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Digitized  by  the  Internet  Archive 
in  2008  with  funding  from 
•  IVIicrosoft  Corporation 


http://www.archive.org/details/anatomyofrailroaOOwoodrich 


THE  ANATOMY  OF  A  KAILROAD  REPORT 

AND 

TON-MILE  COST, 


Nelson's 

Wall  Street  Library 

Volume  II. 


The  Anatomy  of  a  Railroad 
Report  ^/;/^  Ton-Mile  Cost 


NEW   YORK 
DOUBLEDAY,    PAGE  &  CO. 

1909 


Copyright, 
1900. 


AUTHOR'S  PREFACE  TO  REVISED 
EDITION. 


In  issuing  an  abridged  and  revised  edition  of  the  "Anat- 
omy of  a  Eailroad  Report,"  the  author  wishes  it  to  be  under- 
stood that  he  offers  the  book  as  a  mere  primer.  It  is  de- 
signed mainly  for  the  use  of  those  people  who,  while  inter- 
ested in  railroad  investments,  are  nevertheless  wholly  un- 
acquainted with  railroad  accounts. 

T.  F.  W. 


CONTENTS* 


THE  ANATOMY  OF  A  RAILROAD  REPORT. 

PAGE 

Author's  Preface  7 

Introductory  11 


CHAPTER  I. 

Income  or  Revenue  Account 14 

Income 15 

Operating  Expenses 17 

Conducting    Transportation 19 

Maintenance  of  Way  and  Structures 20 

Maintenance  of  Equipment 21 

General  Expenses 23 

Fixed  Charges. 24 

CHAPTER  II. 

The  Balance  Sheet 28 

Capital  Assets 29 

Current  Assets 32 

Capital  Liabilities 36 

Current  Liabilities 39 

CHAPTER  III. 

Physical  Statistics 43 

Length  and  Characteristics  or  Road 43 

Number  and  Description  of  Equipment 45 

Volume  and  Character  of  Business  Done 46 

General  Remarks 48 


CONTENTS. 
TON-MILE  COST. 

PAGE 

Introductory  , 5a 

CHAPTER  I. 
The  Unit  of  Transportation 61 

CHAPTER  11, 
The  Units  of  Railroad  Service 68 

CHAPTER  III. 
The  Units  of  Railroad  Cost 74 

CHAPTER  IV. 
The  Units  of  Railroad  Cost  (continued) 82 

CHAPTER  V. 
Allocation  of  Expenses  Between  Freight  and  Passengers. . .  yi 

CHAPTER  VI. 
The  Question  of  Ton-Mile  Cost 101 

CHAPTER  VII. 
Ton-Mile  Cost— The  Train  Load » 107 

CHAPTER  VIII. 
Ton-Mile  Cost— Other  Factors. . . , . .  o 112 

CHAPTER  IX. 
Predetermination  of  Ton-Mile  Cost 115 


1 ' '  > ' . 


THE  ANATOMY  OF  A  RAILROAD 
REPORT. 


INTEODUCTORY. 

It  woula  be  well  if  people  generally  understood  the  true 
meaning  of  a  railroad  report.  To  most  it  is  a  meaningless 
mass  of  unintelligible  figures  which  are  undecipherable  and 
generally  confusing.  In  order  to  assist  the  general  reader 
to  a  proper  understanding  of  the  matter  the  following  pages 
are  offered  in  explanation  of  the  manner  in  which  a  railroad 
report  is  built  up.  An  effort  to  exhibit  in  a  skeletonized 
form  the  anatomy  of  a  railroad  report  will  be  made. 

The  object  of  a  railroad  report  should  be  to  convey  to 
proprietors  an  accurate  idea  of  the  condition  of  their  prop- 
erty, both  physical  and  financial,  so  that  they  may  know 
pretty  well  all  the  principal  circumstances  affecting  its  wel- 
fare.   Obviously,  it  should  cover  these  points : 

1.  Its  earning  power. 

2.  Its  financial  position, 

3.  Its  main  physical  characteristics  and  conditions,  for 
when  these  are  accurately  known,  the  value  of  the  property 
is  known. 

Thus  a  railroad  report  naturally  divides  itself  into  three 
parts : 

1.  Income  or  revenue  account,  showing  income  and  ex- 
penditure. 

u 


l/?'r  \  \/'  C^^^  ^l^ATb^Y  P?' A  RAILROAD  REPORT 

2.  Financial  statement  or  Balance  sheet. 

3.  Physical  statistics. 

Of  these  three  probably  the  second  is  the  most  important 
of  all,  but  all  are  important.  No  report  is  satisfactorily 
complete  which  omits  any  of  them. 

These  three  main  divisions  naturally  divide  themselves 
into  several  minor  subdivisions  as  follows : 

1. — Income  or  Eevenue  Account  should  contain: 

a.  Gross  earnings; 

b.  Operating  expenses; 

c.  Net  income  from  all  sources; 

d.  Charges  for  interest,  etc.,  and  all  charges  before 

dividends; 

e.  Dividends  and  surplus, 

2. — The  Financial  Statement  or  Balance  Sheet 
should  contain: 

a.  Statement  of  capital  liabilities; 

b.  Statement  of  capital  assets; 

c.  Statement  of  current  liabilities; 

d.  Statement  of  current  assets. 

3. — The  Ppiysical  Statistics  should  show: 

a.  Length  and  characteristics  of  road; 

b.  Number,  description  and  performance  of  equip- 

ment; 

c.  Volume  and  character  of  business  done. 
When  these  things  are  shown  in  sufficient  detail  it  may 


THE  ANATOMY  OF  A  RATLKOAD  REPORT  1  3 

be  said  that  the  report  is  complete.  If  any  are  wanting  tlic 
report  is  imperfect.  Of  course,  most  railroad  reports  ordi- 
narily give  other  information  besides  this.  One  expects,  for 
example,  an  explanation  from  the  president  and  general 
manager  of  any  remarkable  changes  during  the  year  in  their 
respective  departments.  It  would  be  possible  to  extract  an 
explanation  from  the  figures  themselves,  if  they  are  pre- 
sented in  sufficient  detail,  but  it  is  well  to  have  an  official 
statement  as  well. 

In  these  pages  an  effort  will  also  be  made  to  show  in  some 
detail  w^hat  enters  into  each  account,  and  the  bearing  of 
each  account  on  the  whole.  It  must  be  remembered  that  the 
object  is  not  so  much  to  propound  an  abstract  theory,  as  to 
show,  in  a  practical  way,  with  an  example  or  two,  the  gen- 
eral lines  on  w^hich  reports  are  laid  down. 

It  is  greatly  to  be  regretted  that  there  is  not  more  uni- 
formity in  the  reports  of  railroads  in  this  country.  In  Great 
Britain  all  railroads  report  in  precisely  the  same  manner, 
so  as  to  allow  of  very  ready  comparison.  It  is  true  that  the 
English  form  is  not  good  in  itself,  being,  indeed,  grossly  in- 
complete, but  it  has  the  merit  of  uniformity  in  use. 


CHAPTER  I. 

Income  or  Revenue  Account. 

The  typical  form  for  the  Income  or  Revenue  Account 
of  a  railroad  company,  omitting  detail,  is  as  follows : 

Gross  earnings  from  operation $12,000,000 

Operating  expenses 8,000,000 

Net  earnings $4,000,000 

"Other"  income 250,000 

All  income $4,250,000 

Fixed  and  "other"  charges 3,250,000 

Balance.  .  (^.^t .  X,  7l  f".  V.  \\\  f....  $1,000,000 
Dividends 600,000 

Surplus $400,000 

In  this  form  such  an  account  explains  itself.  It  is  nat- 
urally divided  into  three  principal  heads:  viz.,  income,  ex- 
penses, and  -fixed  charges.  The  item  of  surplus  more  prop- 
erly falls  for  consideration  under  the  Balance  Sheet,  and 
will  be  dealt  with  thereunder. 

14 


THE  ANATOMY  OF  A  RAILROAD  REPORT  15 


Income. 

The  income  of  a  railroad  arises  from  two  principal 
sources:  (1)  operation  and  (2)  interest  on  loans  and  in- 
vestments, or  rentals. 

Gross  income  from  operation  consists  of 

(a)  Eevenue  from  passenger  transportation; 

(&)  Revenue  from  freight  transportation; 

(c)  Revenue  from  baggage,  storage,  mail,  stock  yards, 
steamers,  elevators,  etc; 

(d)  Balance  of  car-mileage,  switching  charges; 

(e)  Telegraph  companies,  etc. 

The  chief  point  about  these  items  is  that  all  should  be 
shown  in  gross.  Rebates  are,  or  should  be,  in  all  cases  de- 
ducted from  gross  earnings  before  the  latter  are  reported. 
Commissions  belong  to  operating  expenses.  The  intention 
is  to  show  in  this  account  the  absolute  gross  revenue  de- 
rived from  every  branch  of  the  company's  business,  before 
operating  expenses  are  paid. 

Obviously,  there  is  not  much  room  for  mistakes  in  this 
part  of  the  report.  It  used  to  be  thought  impossible  to 
"cook''  gross  earnings,  until  Atchison  showed  how  it  could 
be  successfully  done  over  a  series  of  years.  It  could  not  have 
been  done  in  the  case  of  this  road  but  for  the  magnitude  of 
all  items,  and  the  complexity  of  the  report,  enabling  suspic- 
ior:  items  in  the  balance  sheet  to  escape  notice.  If  all  the 
items  in  ?.  company's  capital  account  are  shown  in  proper 


16  THE  ANATOMY  OF  A  RAILROAD  REPORT 

detail,  and,  especially,  if  the  "cost  of  road"  and  "construc- 
tion" items  are  sufficient!}^  detailed,  it  is  imj^ossible  for  any 
one  item  to  be  manipulated,  without  throwing  all  the  others 
into  confusion,  thus  leading  to  immediate  discovery. 

For  example:  suppose  gross  income  to  be  overstated  by 
$500,000  and  an  unearned  dividend  thus  paid  for  specula- 
tive purposes.  An  increase  will  probably  be  effected  in 
"current  liabilUies/'  as  the  money  will  most  likely  have  been 
borrowed  for  the  dividend.  This  involves  a  corresponding 
increase  of  $500,000  on  the  "assets"  side  of  the  balance 
sheet.  If  all  the  "assets"  are  properly  stated  with  sufficient 
detail  in  the  report,  the  fraud  must  be  discovered  at  once. 
It  is  desirable  therefore  that  gross  earnings  be  shown  in  con- 
siderable detail,  and  that  the  statement  of  assets  and  liabil- 
ities be  complete. 

2.  "Interest  on  loans  and  bonds  held  as  investments/* 
"dividends  07i  stocks  owned/'  and  "rentals  received  on  prop- 
erty leased/'  are  all  simple  enough  items.  The  report  should 
give  an  itemized  statement  of  stocks  and  bonds  held,  and  of 
rentals  received  for  property  leased,  so  that  all  this  income 
can  be  properly  traced  to  its  source.  Very  few  companies  do 
this  in  a  satisfactory  way.  In  the  case  of  some,  "other  in- 
come" has  been  used  in  connection  with  "current  assets'' 
as  a  means  of  paying  unearned  dividends. 

There  are  other  sources  of  income  besides  those  enumer- 
ated, but  they  are  not  large  enough  to  require  special  atten- 
tion, unless,  of  course,  railroads  operate  coal  mines,  etc.,  and 
if  they  have  sufficiently  elastic  charters,  conduct  all  kinds 


THE  ANATOMY  OF  A  RAILROAD  REPORT  17 

of  miscellaneous  business,  in  addition  to  the  ordinary  busi- 
ness of  transportation.  In  the  case  of  coal-mining  and  such 
like  operations  conducted  on  a  large  scale,  a  separate  return 
should  be  made,  and  the  final  result  shown  in  the  shape  of 
'"oilier  income"  or  charges  against  ''surplus"  or  "profit  and 
loss"  account. 

The  "Income  Account"  of  properties  leased  should 
be  shown  separately  in  the  report.  That  of  proprietary  com- 
panies, all  of  whose  stock  is  owned,  should  be  included  in 
the  general  income  account.  It  should  be  possible  to  learn 
from  a  report  just  how  every  leased  property  is  doing,  and 
whether  the  lessee  makes  a  profit  or  a  loss  on  its  operations. 

In  conducting  any  large  manufacturing  or  warehouse 
business  successfully,  a  thorough  system  of  cost  books  is 
kept,  that  the  owners  may  thereby  allocate  to  each  depart- 
ment or  even  contract  its  proper  share  of  expenses.  Thus 
they  know  at  once  whether  or  not  a  department  is  or  not 
self-sustaining,  or  whether  a  contract  pays  or  not.  Such 
information  is  necessary  for  the  proper  conduct  of  other 
businesses,  and  it  is  most  emphatically  necessary  in  the  case 
of  a  railroad. 


Operating  Expenses. 

This  is  an  extremely  important  item  in  a  railroad  report, 
and  is  deserving  always  of  the  closest  attention.  It  is  the 
item,  of  all  others,  most  susceptible  of  manipulation,  and 
the  most  suggestive  and  illustrative  of  the  management  of  a 


18  THE  ANATOMY  OF  A  RAILROAD  REPORT 

propert3\  It  cannot  possibly  be  shown  in  too  great  detail 
in  a  report.    As  a  rule  it  is  not  made  sufficiently  clear. 

The  general  theory  of  operating  expenses  may  be  said 
to  be  this :  a  railroad  should  charge  to  this  account  all  ex- 
penditures necessary  to  conduct  the  company's  business  and 
leave  the  property  at  the  end  of  the  year  in  at  least  as  great 
a  condition  of  efficienc}^  in  all  respects,  as  it  was  at  the  be- 
ginning of  the  year.  In  theory,  anything  which  improves 
the  condition  of  the  property  may  be  charged  to  capital  ac- 
count, as  may  all  additions  which  are  not  replacements. 
This,  however,  is  the  strict  theory  which  has  been  practically 
abandoned  by  most  modern  roads.  The  tendency  of  modern 
management  is  to  charge  to  operating  expense  the  cost  of 
all  improvements  and  additions  which  do  not  increase  gross 
revenue,  or  at  least  immediately  save  their  cost  in  operating 
expense. 

The  importance  of  a  proper  classification  of  operating 
expenses  may  be  seen  from  the  fact  that  tbe  Inter- State 
Commerce  Commission  has  issued  a  pamphlet,  for  the  use 
of  railroads  reporting  to  it,  which  embodies  the  views  of  the 
most  experienced  railroad  men,  and  represents  about  four 
years  of  work.  This  pamphlet  divides  ^'operating  expenses" 
into  four  classes : 

(1)  Maintenance  of  ivay  and  structure; 

(2)  Maintenance  of  equipment; 

(3)  Conducting  transportation; 

(4)  General  expenses; 

and  divides  each  of  these  classes  into  a  large  number  of  sub- 
divisions, of  which  there  are  no  less  than  fifty-three  in  all. 


THE  ANATOMY  OF  A  RAILROAD  REPORT  19 


Conducting  Transportation. 

This  item  includes  all  expenses  in  connection  with  the 
business  of  hauling,  transporting,  or  storing  freight  and 
passengers,  and  its  main  subdivisions  may  be  given  as  fol- 
lows : 

(a)  Salaries  and  wages  {operating  department); 

(b)  Supplies  (operating  department); 

(c)  Car  mileage  and  swiiching  charges; 

(d)  Daniage  for  injuries,  and  advertising ; 
{e)  Outside  agencies  and  commissions; 

(/)  Rents  of  tracks,  yards,  and  terminals. 

In  this  account  should  be  charged  all  wages  and  salaries 
of  persons  employed  in  the  direct  operation  of  the  road,  as 
distinguished  from  maintenance,  and  all  supplies  used  for 
this  purpose.  The  rents  for  tracks,  yards,  and  terminals 
should  include  all  those  paid  in  connection  with  direct  oper- 
ation. "Commissions"  should  only  be  included  specially  in 
this  account,  when  paid  to  persons  not  employed  by  the  com- 
pany. All  these  items  should  be  shown  clearly  and  dis- 
tinctly, in  as  great  detail  as  possible. 

In  a  general  way  the  proportion  of  "Conducting  Trans- 
portation" expenses  to  gross  earnings  is  an  index  to  the 
efficiency  of  operation  and  it  is  tlie  department  of  expense 
that  most  directly  responds  to  "train  load"  changes. 


20  THE  ANATOMY  OF  A  RAILROAD  REPORT 


Maintenance  of  Way  and  Structures. 

This  is  one  of  the  two  most  important  items  of  operating 
expenses.  Under  this  head  come  all  charges  in  connection 
with  the  maintenance  of  the  permanent  way  and  structures 
in  good  condition.    It  may  be  divided  as  follows : 

(a)  Uepairs  of  roadway; 

{!))  Renewals  of  rails  and  ties; 

(c)  Repairs  and  reneivals  of  bridges,  culverts,  fences, 
crossings,  signs,  cattle  guards,  stations,  buildings,  docl's, 
tuharves  and  telegraph. 

The  item  ^'reneivals  of  rails  and  ties'^  is  very  important 
and  should  be  very  detailed.  The  report  should  state  the 
number  and  cost  of  ties  laid,  and  the  proportion  of  the  track 
so  laid;  also  the  amount  and  description  of  rails  laid,  and 
the  proportion  of  the  track  relaid  therewith.  It  is  allowed 
to  a  company  to  deduct  from  the  charge  for  new  steel  rails 
the  value  of  the  old  taken  up.  Some  companies,  however, 
adopt  the  practice  of  charging  to  "construction"  the  dif- 
ference in  the  weight  of  the  new  rail  and  the  original  weight 
of  the  old  rail  taken  up.  If  for  example,  a  60-pound  rail  is 
replaced  by  an  SO-pound  rail,  the  extra  20  pounds  are 
charged  to  capital.  This  is  not  in  accord  with  the  best  mod- 
ern practice. 

Every  railroad  should  replace  or  provide  for  the  replacing 
of  a  proper  amount  of  rails  every  year.  The  average  life  of 
a  steel  rail  varies  very  much  on  various  roads,  as  does  also 


THE  ANATOMY  OF  A  RAILROAD  REPORT  21 

the  life  of  a  tie,  to  a  lesser  extent.  Supposing,  for  argu- 
ment's sake,  however,  that  the  average  life  of  a  rail  is  twenty 
years,  and  the  average  life  of  a  tie  eight  years,  a  road  should 
provide  for  renewing  at  least  one-twentieth  of  its  track  each 
year,  on  an  average,  with  rails,  and  one-eighth  Avith  new 
ties,  even  though  the  rails  and  ties  are  not  actually  laid  in 
the  year. 

The  item  ''repairs  and  renewals  of  hridges,  culverts^ 
fences,  etc./'  is  simple  enough.  Most  companies  will  charge 
to  ^'construction''  the  cost  of  an  iron  or  stone  bridge  in  ex- 
cess of  the  cost  of  the  trestle  replaced,  and  the  cost  of  similar 
improvements  in  docks,  wharves,  buildings,  culverts,  etc.  It 
is  much  more  reassuring  to  see  this  met  entirely  out  of  oper- 
ating expenses. 

In  the  proper  operating  of  a  railroad  the  item 

Maintexance  of  Equipment. 

needs  very  careful  attention,  and  most  complete  and  de- 
tailed form  of  statement  in  the  report.  There  should  be 
charged  to  this  account,  every  year,  at  least  that  amount 
of  money  necessary  to  keep  all  the  company's  rolling  stock, 
marine  equipment,  and  repair  shops  intact  as  to  number  or 
capacity  and  in  good  condition,  so  that,  at  the  end  of  the 
year,  everything  shall  be  in  a  state  of  as  great  efficiency  as  it 
was  at  the  beginning  of  the  year. 

A  rather  common  practice  of  railroads  is  to  consider  their 
freight  cars  by  capacity,  and  not  by  number,  and  to  regard 
their  dutv  of  ranintcnance  as  fulfilled    when    the    freidit 


23  THE  ANATOMY  OF  A  RAILROAD  REPORT 

equipment  has  as  great  a  capacity  at  the  end  of  the  year  as 
at  the  beginning.  For  example,  under  each  method  a  com- 
pany would  consider  that  it  had  done  all  that  could  reason- 
ably be  expected,  when  it  had  replaced  twenty  10-ton  cars 
by  ten  20-ton  cars.  No  doubt  this  is  strictly  correct,  as  far 
as  the  theory  goes.  When,  however,  a  change  in  the  char- 
acter of  the  equipment  becomes  necessary,  in  order  to  hold 
trade,  it  would  be  better  policy  to  pursue  a  liberal  course, 
and  construe  the  theory  less  strictly. 

The  details  of  a  company's  equipment  report  should  be 
closely  watched.  Sometimes  companies,  instead  of  making 
replacements  out  of  expenses,  will  allow  a  large  amount  of 
equipment  to  be  destroyed,  and  finally  replace  it  in  one  form 
or  another  out  of  capital. 

In  bad  times  companies  have  a  habit  of  postponing  re- 
newals and  repairs  of  equipment.  The  report,  in  such  cases, 
usually  shows  either  a  large  shortage  of  equipment,  or  a 
large  proportion  of  the  equipment  "in  hospital,"  or  unfit  for 
service.  Either  of  these  signs  are  danger  signals,  and  should 
be  closely  investigated. 

A  report  should  carry  a  special  account  for  "equipment,"^ 
in  which  should  be  shown  all  capital  charges  on  this  ac- 
count from  the  outset,  in  such  a  way  that  it  could  be  possi- 
ble to  see  the  book-cost  of  the  company's  equipment,  separ- 
ately for  locomotives,  passenger  cars,  freight  cars,  and  mar- 
ine equipment.  Very  few  roads  do  this  satisfactorily.  Penn- 
syhania  supplies  a  good  model  of  such  a  statement.  It  is 
probable  that  there  are  not  a  dozen  roads,  in  the  whole  coun- 
try, which  could  show  this  account  properly  charged  from 


THE  ANATOMY  OF  A  KAILKOAD  KErOKT  23 

the  beginning,  except  those  which  have  closed  their  "con- 
struction" account  permanently.  Proof,  however,  is  ex- 
tremely difficult  to  obtain,  because  few  roads  supply  the  in- 
formation necessary. 


General  Expenses. 

This  item  includes  salaries  of  general  officers  and  clerks, 
law  expenses,  and  insurance,  etc.,  and  is  the  least  important 
and  significant  of  any  of  the  operating  charges. 

It  is  easy  to  see  how  valuable  an  index  to  the  condition 
and  management  of  a  property  is  a  clearly  detailed  and 
complete  schedule  of  operating  expenses.  One  part  of  such 
a  schedule,  moreover,  will  throw  light  on  another  in  a  strik- 
ing way,  at  times.  It  is,  of  course,  quite  impossible  to  lay 
down  a  hard  and  fast  rule  as  to  the  proportion  which  "main- 
tenance" expenditures  should  bear  to  the  whole,  but  compar- 
ison of  a  given  road  with  itself  a  few  years  back,  or  with 
a  neighbor,  will  often  show  instructive  results.  It  is  prob- 
ably safe  to  reckon  5  cents  per  engine-mile,  1  1-4  or  1  1-8 
cents  per  passenger  car-mile  and  5@6  mills  per  freight  car- 
mile  as  sufficient  allowance  for  keeping  equipment  intact 
and  in  good  condition. 

As  a  general  rule,  a  large  increase  in  "conducting  trans- 
portation" should  be  accompanied  by  a  certain  increase  in 
"maintenance."  If  there  is  a  discrepancy  in  this  respect,,  it 
should  be  looked  into  at  once,  especially  if  the  road  is  free 
with  capital  issues,  or  has  treasury  bonds  available  for  sale. 


24  THE  ANATOMY  OF  A  RAILROAD  REPORT 

The  proportion  of  operating  expenses  to  earnings  varies 
greatly.  A  company  which  professes  to  operate  at  a  very 
low  ratio  should  make  it  very  clear  how  it  can  do  so.  The 
ratio,  how^ever,  taken  by  itself  is  quite  meaningless.  As 
long  as  maintenance  expenditures  are  sufficient  the  lower 
the  ratio  the  better.  No  other  general  rule  can  be  laid  down 
here. 

Fixed  Charges. 

The  item  of  "fixed  charges''  in  a  report  includes  as  a  rule 
the  following  charges: 

(a)  Interest  on  funded  deht; 

(b)  Interest  on  floating  deht; 

(c)  Rentals; 

(d)  Taxes; 

(e)  Sinking  funds; 

although  exception  may  be  taken  to  one  or  two  of  these. 
Still,  all  of  these  are  charges  prior  to  dividends  on  capital 
stocks,  and,  as  such,  come  under  the  generic  term  of  fixed 
charges. 

With  regard  to  "interest  on  funded  deht/'  all  that  is 
needed  is  that  it  be  stated  clearly  and  separately.  There 
should  be  a  statement  of  the  amounts  and  kinds  of  bonds 
outstanding,  and  the  interest  thereon.  The  charges  for  "in- 
terest on  unfunded  or  floating  deht"  should  also  be  specially 
set  forth  alone.  It  will  be  remembered  that  the  Missouri 
Pacific  reports  in  1893  and  1892  did  not  do  this,  with  the 
result  that  few  people  were  aware  that  the  interest  had  not 


THE  ANATOMY  OF  A  RAILROAD  REPORT  25 

been  charged  up  in  those  years,  until  tliey  saw  the  189  I  re- 
port, which  admitted  this.  Ohviously,  this  is  an  unde-irable 
state  of  affairs.  It  is  also  of  interest  to  know  how  much 
the  company's  floating  debt  costs  to  carry. 

The  item  of  ''rentals''  should  be  stated  in  sufficient  detail 
to  enable  one  to  separate  the  rentals  for  each  piece  of 
property  from  the  rest. 

''Taxes"  explain  themselves.  Some  think  that  ''operating 
expenses''  would  be  the  most  natural  place  for  them,  but  the 
proper  theory  places  them  among  other  "-fixed  charges." 
All  that  is  required  is  that  they  shall  be  separately  stated  in 
the  report. 

The  item  "sinking  funds"  is  peculiar  in  some  ways,  and 
is  treated  differently  by  various  roads.  The  theory  of  sink- 
ing funds  is  that  a  certain  sum  should  be  set  aside  from 
net  earnings,  to  be  applied  to  the  redemption  of  bonds,  in 
addition  to  the  payment  of  regular  interest  thereon.  Some 
mortgages  expressly  provide  for  a  sinking  fund,  etc.,  and 
the  proper  way  is  for  the  sinking  funds  to  be  met  out  of 
earnings.  The  usual  course  with  such  is  to  draw  a  certain 
quantity  of  bonds  every  year  for  repayment,  where  so  pro- 
vided, or  to  purchase  a  certain  quantity  of  bonds,  which 
may  be  kept  alive  in  the  sinking  fund.  The  interest  on 
bonds  in  a  sinking  fund  belongs  to  the  fund,  and  should  not 
be  used  for  other  purposes  without  it  being  clearly  so  stated. 

In  "sinking  funds"  should  also  ho  included  and  stated 
separately  payments  on  account  of  principal  of  car  trusts, 
equipment  trusts,  etc.,  these  amounts  usually  being  calcu- 
lated over  a  series  of  years.     Obviously  these  are  a  prior 


26  THE  ANATOMY  OF  A  RAILROAD  REPORT 

charge  to  dividends,  as  the  essence  of  an  equipment  or  car 
trust  is  that  it  shall  be  paid  off  out  of  revenue.  It  is  not 
usual  for  roads  to  make  car  trusts  or  equipment  trusts,  un- 
less funds  cannot  be  obtained  in  other  ways,  as  by  sale  of 
securities.  Speaking  generally,  car  trusts  are  a  sign  of  pov- 
erty, although  there  are  exceptions,  as,  for  example,  Penn- 
sylvania, which  has  several  car  and  equipment  trusts. 

When  "fixed  charges"  have  been  deducted  from  the  total 
net  income,  the  balance  is  the  ''surplus"  that  properly  be- 
longs to  the  stockholders,  and  is  subject  to  their  directions. 
It  represents  the  profit  of  the  business,  after  all  prior  charges 
have  been  met,  all  expenses  paid,  and  the  property  sufficient- 
ly maintained.  Out  of  this  surplus  comes  whatever  divi- 
dends are  paid  on  the  stocks,  preferred  and  common,  of  the 
company.  What  remains  after  this  is  done  becomes  ''sur- 
plus"  and  is  added  to  ''profit  and  loss"  or  "surplus  income 
account." 

This  ''Profit  and  Loss"  account  is  a  necessary  concomi- 
tant of  the  company's  "Income  Account,"  as  it  shows  the 
application  of  the  company's  surplus  income.  A  typical 
form  thereof  is  as  follows: 

By  balance,  June  30,  1893 .$4,800,000 

Surplus  income  year  ending  June  30,  1894.  .$400,000 

To  adjustments $100,000 

Depreciation  stocks  and  bonds...     100,000      200,000  200,000 

Balance  June  30, 1894 $5,000,000 

A  "Profit  and  Loss"  account  may  also  be  arranged  so  as 
to  exhibit  the  payments  for  expenses,  fixed  charges,  and  div- 


THE  ANATOMY  OF  A  RAILROAD  REPORT  27 

idcnfls,  but  this  practice  is  unsound  in  theory,  as  these  are 
sjDecific  charges  against  the  year's  income.  "Profit  and 
Loss"  has  nothing  to  do  with  the  operations  of  a  given  year 
except  to  receive  and  register  the  final  outcome.  The  above 
is  a  proper  complement  to  the  form  of  "Income  Account" 
given  before. 

This  completes  the  information  necessary  to  give  a  fair 
idea  of  the  '^earning  power''  of  a  property.  It  is,  however, 
advisable  to  reduce  the  amounts  to  a  "per  mile"  basis,  for 
purposes  of  ready  comparison  with  other  roads.  Most  re- 
ports do  this  in  the  case  of  gross  earnings,  operating  ex- 
penses, and  net  earnings,  and  there  is  no  reason  why  they 
should  not  also  do  it  for  interest  and  fixed  charges,  and  divi- 
dends, so  to  make  a  complete  showing.  Any  one  can  do  it, 
however,  for  himself,  provided  that  the  -report  is  properly 
constructed. 


CHAPTER  II. 

The  Balance  Sheet. 

We  now  come  to  the  most  important,  individual  item  in 
a  railroad  report,  which  is  absolutely  indispensable  to  a  clear 
understanding  of  a  company's  position.  This  is  the 
Financial  Statement  or  Balance  Sheet.  If  no  other 
piece  of  information  regarding  a  company  were  obtainable 
than  this,  quite  a  good  deal  might  be  gleaned  from  it,  and,  if 
only  one  account  were  given  to  the  public,  this  account 
would  be  the  one  to  ask  for. 

It  consists  of  a  statement  of  the  company's  "assets''  and 
^liabilities/'  viz.,  what  the  company  has,  and  what  it  owes 
at  the  date  of  the  report.  In  theory,  a  balance  sheet  should 
be  extremely  simple,  but  in  practice  it  is  often  extremely 
complex.  There  is  not  a  railroad  in  the  country  which 
should  not  be  able  to  issue  its  balance  sheet  in  an  intelligi- 
ble form  which  would  need  no  explanation,  yet  there  are 
hardly  a  score  of  roads  which  do  not  offer  in  their  reports  a 
balance  sheet  needing  explanation  in  the  case  of  individual 
items. 

Any  balance  sheet  can  be  condensed  into  the  following : 
Dr.  Cr. 

Assets.  Liabilities. 

Capital  assets.  Capital  liabilities. 

Current  assets.  Current  liabilities. 

Profit  and  loss  (deficit).  Profit  and  loss  (surplus). 

28 


THE  ANATOMY  OF  A  RAILROAD  REPORT  29 

^'Profit  and  loss"  may  be  on  cither  side  of  the  account, 
according  as  there  is  a  debit  or  credit  bahmce  thereto. 

Obviously  there  are  a  very  large  number  of  items  which 
may  be,  and  in  fact  ought  to  be,  presented  under  the  main 
heads.  Some  roads  err  on  the  side  of  incompleteness ;  others 
on  the  side  of  diff useness ;  many  on  the  side  of  obscurity. 


Capital  Assets. 

The  item  of  ''capital  assets"  contains : 

(a)  Property  and  franchise,  equipment  and  plant,  or 
"Cost  of  road  and  equipment." 

(b)  Investments  in  securities  and  real  estate. 

(c)  Sinking  funds. 

The  item  ^'property  and  francliise,  equipment,  etc.,^'  is 
what  is  known  as  the  "construction  account"  and  represents 
tlie  capital  invested  in  the  road  and  equipment.  It  is  often 
customary,  also,  to  charge  to  this  account  certain  other 
items  such  as  "discount  on  securities  sold,"  and  other  items 
of  cost  incurred  in  acquisition  of  property,  or  in  improve- 
ment of  property,  as  described  in  the  remarks  dealing  with 
'''operating  expenses."  To  this  account  are  sometime? 
charged  expenses  in  connection  with  financing  of  capital 
issues,  or  reorganization  of  the  company. 

Obviously,  the  charges  to  "construction  account"  are  cap- 
able of  much  abuse,  and  it  is  extremely  desirable  that  a  road 
should  report,  as  do  many,  each  year,  the  exact  constitution 
of  its  "construction  account"  and  the  items  making  the  total 


30  THE  ANATOMY  OF  A  RAILROAD  REPORT 

thereof.  The  account  should  be  presented  each  year  in  such 
a  way  as  to  afford  a  means  of  accurate  comparison  of  item 
with  item,  present  with  former  reports.  It  should  be  possi- 
ble to  see  how  much  money  has  gone  into  equipment, 
bridges,  fences,  etc.,  over  a  series  of  years.  In  this  way  it 
would  be  impossible  for  a  railroad  to  use  its  "cost  of  road, 
etc.,'^  account  to  juggle  with. 

Most  railroads  give  in  their  reports  a  statement  of  the 
annual  charges  to  ''construction  account/'  but  this  is  com- 
paratively seldom  as  complete  as  one  could  wish,  and  often 
it  does  not  agree  with  the  changes  in  ''cost  of  road'"  items, 
by  reason  of  the  latter  containing  items  not  covered  in  the 
separate  statement  of  '' construction  account."  The  actual 
magnitude  of  a  road's  "construction  account"  is  not  of  in- 
dividual importance,  but  is  only  important  for  purposes  of 
comparison  with  itself  at  an  earlier  date.  There  are  prob- 
ably very  few  roads  in  the  country  whose  ^'construction  ac- 
count" does  not  contain  a  vast  amount  of  items  represent- 
ing absolutely  no  value.  Take,  for  example,  the  case  of  the 
Atchison  company.  According  to  Mr.  Stephen  Little,  the 
"cost  of  road  and  appurtenances'  stood  at  $95,755,207  at 
reorganization.  Of  this  amount  over  $40,000,000  stood  for 
nominal  entries,  such  as  "discount  on  honds"  and  "reor- 
ganization expenses,"  and  less  than  half  of  the  total  really 
represented  "cost  of  road"  The  whole  importance  of  the 
item,  in  fact,  is  in  the  changes  reported  in  it  from  year  to 
year,  which  must  be  fully  and  accurately  accounted  for. 

The  principle  may  be  laid  down  that  in  a  report  of  a  rail- 
road with  a  lot  of  subsidiary  roads  owned  or  controlled,  a 


THE  ANATOMY  OF  A  RAILROAD  REPORT  3 


special  revenue  account  sliould  be  given  in  which  the  '' gross 
earnings"  would  include  only  the  earnings  of  that  property 
included  in  ""cost  of  road.''  If  the  properties  appear  in 
any  other  way  in  the  balance  sheet  (as  in  ''investments  in 
securities")  a  separate  income  account  should  be  shown, 
especially  if  the  bonds  are  guaranteed  by  the  main  system. 
Very  few  roads  make  it  possible  to  see  how  their  controlled 
and  proprietary  roads  are  doing.  The  point  is  an  important 
one. 

"Investments  in  securities  or  real  estate"  is  an  item  which 
is  satisfactorily  shown  by  comparatively  few  roads.  Almost 
every  road  in  the  country  owns  a  large  quantity  of  stocks  and 
bonds  of  other  roads.  These  may  be  acquired  in  a  great  va- 
riety of  waj^s;  by  buying  outright  for  purposes  of  control, 
by  exchange  of  stock  for  the  same  purpose,  by  original  sub- 
scription, in  payment  of  advances  made,  in  payment  for  con- 
struction-work done,  etc.,  etc.  It  may  be  said  that  the  ma- 
jority of  the  stocks  and  bonds  held  by  most  companies  are 
held  for  the  purpose  of  controlling  other  roads.  There  are 
exceptions,  of  course,  but  there  are  not  a  great  many  such 
cases. 

The  importance  of  a  clear  showing  of  the  item  of  ''invest- 
ments in  stocks  and  bonds"  lies  in  the  effect  of  this  item  on 
"other  income"  in  the  income  account.  The  revenue  derived 
from  the  dividends  and  interest  on  stocks  and  bonds  owned 
ought  to  be  stated  separately  and  distinctly.  The  impor- 
tance of  showing  the  operation  of  a  company's  proprietary 
and  subsidiary  roads  separately,  lies  in  the  inclusion  of  the 
profits  from  this  source  in  "'oilier  income.'^     If  these  roads 


32  THE  ANATOMY  OF  A  RAILROAD  REPORT 

are  included  in  "cost  of  road"  this  need  not  be  done,  but  it 
is  distinctly  necessary  that  "other  income"  be  shown  in  de- 
tail as  to  every  item.  There  should,  therefore,  be  in  every 
railroad  report  a  schedule  showing  the  exact  holdings  of 
stocks  and  bonds,  and  the  revenue  derived  therefrom.  This, 
moreover,  would  supply  a  clew  to  the  value  of  the  company's 
investments  in  securities.  Unfortunatel}^  some  companies 
are  not  desirous  of  much  light  being  thrown  on  these  things. 

When  a  portion  of  a  company's  securities  are  employed 
to  secure  an  issue  of  collateral  trust  bonds,  as  is  the  case  with 
many  roads,  the  hypothecated  securities  should  be  grouped 
separately.    Some  roads  do  this,  some  do  not ;  all  should. 

The  item  "sinhing  funds'^  may  best  be  shown  in  the  bal- 
ance sheet  in  detail,  separating  the  bonds  owned  from  the 
uninvested  cash,  belonging  to  the  fund.  There  should  bo, 
however,  a  separate  statement  of  sinking  funds,  showing 
each  kind  of  bond  separately.  The  best  way  is  for  a  road 
which  has  sinking  funds  to  show  on  the  ^^Liabilities"  side 
of  the  balance  sheet  all  bonds  issued,  whether  in  sinking 
funds  or  not,  and  charge  revenue  with  the  full  interest 
thereon.  Interest  on  live  bonds  in  a  sinking  fund  belongs 
to  that  fund,  and  should  not  be  diverted  therefrom. 

Payments  on  account  of  principal  of  car  trusts  should  be 
treated  in  the  same  way  as  sinking  funds. 

Current  Assets. 

The  '^current  assets"  of  a  road  include  all  the  shifting 
and  changeable  assets  (with  the  exception  of  "material  and 


THE  ANATOMY  OF  A  RAILROAD  REPORT  33 

supplies/'  wliich  is  a  stricily  capital  asset)  which  may  be 
used  for  the  pui-posc  oJ'  liquidating,  at  any  time,  the  ordinary 
business  del)ts  of  the  property,  without  touching  on  the  capi- 
tal assets.     They  include : 

(a)  Cash  on  hand  and  on  deposit; 

(b)  Loans  and  hills  receivable; 

(c)  Accounts  receivable; 

(d)  Due  from  other  companies  and  individuals; 

(e)  Due  from  the  company's  agents  and  officers; 

(f )  Advances  to  other  companies; 

(g)  Sundry  assets. 

Almost  all  railroads  in  this  country  exhibit  the  item  of 
''cash"  in  a  satisfactory  way,  and  the  item  needs  no  comment 
as  long  as  this  is  done.  Some  roads  make  a  practice  of  car- 
rying a  great  deal  of  cash  on  hand,  while  others  carry  very 
little.  When  there  is  little  cash  on  hand  extra  vigilance  on 
the  part  of  the  investor  may  often  prove  useful. 

''Loans  and  bills  receivable"  do  not  ordinarily  form  a 
very  large  part  of  a  railroad's  assets.  They  consist  of  loans 
made  by  the  road,  or  notes  held  by  the  road.  If  shippers 
owe  money  for  freight  transported,  and  give  their  notes 
therefor,  these  would  naturally  appear  as  "bills  receivable" 
Very  lew  railroads  are  absolute  lenders  of  money  in  any 
quantity.  It  would  be  a  good  thing  if,  in  this  case,  the  good 
loans  and  notes  were  separated  from  the  doubtful  or  abso- 
lutely bad.  The  latter,  of  course,  should  be  written  off  to 
"profit  and  loss."  All  roads,  in  time,  acquire  rubbish,  in 
the  shape  of  loans  and  bills  receivable.    Very  few,  however. 


34  THE  ANATOMY  OF  A  RAILROAD  REPORT 

write  them  off  as  they  should,  but  carr}^  them  on  from  year 
to  year,  till  possibly  bankruptcy  and  reorganization  disclose 
them.  A  steadily  growing  volume  of  ''loans  and  hills  re- 
ceivable" is  not,  as  a  rule,  a  good  sign. 

''Accounts  receivable"  explain  themselves.  It  is  one  form 
of  stating  the  amount  due  to  the  road  by  shippers  and  others, 
in  the  ordinary  way  of  business,  and  is  not  of  itself  a  very 
important  item.  Nor  is  the  item  ''due  from  other  com- 
panies and  individuals"  of  itself  a  very  notable  entry,  in- 
cluding as  it  should  merely  debts  due  by  shippers,  and,  per- 
haps, traffic  balances  due  by  other  railroads.  If  the  report, 
however,  include  no  item  for  "advances  to  other  {proprietary 
or  subsidiary)  companies,'^  and  the  item  "due  from  other 
compa7iies  and  individuals"  is  large,  there  is  reason  to  sus- 
pect something  wrong,  especially  if  the  company  have  many 
branch  or  subsidiary  roads,  or  allied  companies. 

This  item  "advances  to  other  cam.panies"  is  very  common 
among  railroads.  It  may  mean  a  number  of  things,  but 
is  chiefly  important  when  it  means,  as  it  often  does,  money 
loaned  by  a  company  to  weak,  struggling,  allied  companies, 
whose  bonds  are  guaranteed  by  the  main  company,  or  of 
which  control  is  held  by  ownership  of  stock,  etc.,  etc.  Al- 
though strictly  a  nominal  asset,  inasmuch  as,  theoretically 
speaking,  the  advance  is  a  charge  against  the  debtor  road, 
which  might  be  met  at  some  time  in  the  dim  and  distant 
future,  practically  it  is  money  lost,  and  represents  the  de- 
fi.'jit  or  loss  on  those  roads,  unrecoverable  except  by  a  miracle. 
These  "advances/'  however  they  appear  in  the  balance  sheet, 
are  almost  always  of  the  same  kind.    Their  significance  lies 


THE  ANATOMY  OF  A  RAILROAD  REPORT  35 

in  the  change  they  produce  in  the  other  side  of  the  balance 
sheet. 

A  certain  company  in  1894  increased  its  bonded  debt  by 
$1,500,000  approximately,  and  increased  its  ''advances  to 
other  companies"  by  about  the  same  amount,  and,  strange 
to  relate,  its  ''other  income"  showed  a  wholly  remarkable  in- 
crease, considering  the  known  circumstances  of  the  case. 
What  happened  was  most  certainly  this.  Being  in  need  of 
increased  revenue  for  dividend  purposes,  the  company 
loaned  the  proceeds  of  its  $1,500,000  bonds  to  one  or  two 
of  its  controlled  companies,  enabling  them  to  increase  their 
dividends,  thus  making  a  larger  "other  income''  to  the  main 
company  from  its  investment :  in  the  controlled  companies, 
and  accomplishing  the  desired  result.  Inasmuch  as  the  ac- 
counts of  the  subsidiary  companies  were  not  published,  the 
transaction  passed  muster,  but,  in  effect,  it  amounted  to 
nothing  less  than  selling  bonds  and  applying  the  proceeds 
to  dividends.  The  essence  of  the  danger  in  the  ^'advances  to 
other  companies"  item  lies  in  the  absence  of  publicity  of  de- 
tail regarding  these  other  companies,  and  it  is  for  this  reason 
that  a  clear  statement  of  operation  for  all  controlled  proprie- 
tary or  leased  roads  (not  included  in  '^cost  of  road")  is  emi- 
nently desirable.  Otherwise,  much  of  importance  cannot 
be  traced.  The  manipulation  of  "advances,  etc.''  with 
"other  income"  nd  increased  floating  or  funded  debt,  is 
very  easy,  in  the  absciu    of  full  details. 

Even  if  there  is  no  suspicion  of  anything  like  this,  it  is 
an  unfavorable  sign  when  money  is  evidently  being  poured 
into    unprofitable    and    struggling    subsidiar}^    properties. 


36  THE  ANATOMY  OF  A  RAILROAD  REPORT 

Eventually  it  must  either  come  to  a  wholesale  writing  off  or 
to  discovery  in  reorganization. 

The  items  "due  from  agents  and  officers"  and  ''sundry 
assets''  need  no  special  description,  the  first  being  plain  on 
the  face  of  it  and  the  latter  seldom  of  importance.  The 
fewer  and  simpler  the  items  of  "cmTent  assets''  the  better ; 
it  denotes  a  '^cleared  up"  condition  of  affairs. 


Capital  Liabilities. 

The  capital  liabilities  of  a  company  are  of  two  kinds : 

1.  Stock:. 

2.  Bonds,  income,  debenture,  or  mortgages; 

the  latter  class  also  including  car-trusts,  real  estate  mort-- 
gages,  and  any  similar  fixed  obligation. 

There  is  no  definite  theory  regarding  the  relative  pro- 
poition  which  the  funded  debt  and  stock  of  a  company 
should  bear  to  the  actual  cost  of  the  property.  It  is  a  fact, 
however,  that,  in  the  case  of  most  railroads  in  this  country, 
the  road  was  built  from  the  proceeds  of  bonds,  and,  there- 
fore, the  stock  represents  chiefly  contractors'  and  promoters' 
profits.  This,  however,  is  of  little  real  importance,  as  the 
"cost  of  road''  is  of  itself  unfortunately  quite  a  "blind"  item 
and  only  significant  in  its  changes  from  year  to  year. 

The  balance  sheet  should  show — and  all  balance  sheets 
do — the  amount  of  capital  stock  of  the  company  outstand- 
ing, whether  or  not  any  is  owned  by  the  company.  ''Treas- 
ury stock,"  if  any,  should  be  separately  shown  among  the 


THE  ANATOMY  OF  A  RAILROAD  REPORT  37 

assets.  It  is  desirable  that  the  balance  sheet  should  show 
the  various  kinds  of  stocks  separately,  first  and  second  pre- 
ferred, and  so  on,  instead  of  "lumping"  them  into  one  item. 

It  would  also  be  a  good  thing  if  every  railroad  report 
showed  the  amount  of  capital  stock  per  mile  of  road  owned. 
It  is  oftentimes  not  very  easy  for  investors  to  arrive  at  a 
correct  amount,  in  consequence  of  complicating  circum- 
stances, and  therefore  such  calculation  would  be  all  the  bet- 
ter for  being  official. 

The  funded  debt  of  a  company  may  consist  of  many  kinds 
of  securities,  as : 

1.  Mortgage  bonds; 

2.  Debenture  bonds; 

3.  Collateral  trust  bonds; 

4.  Income  bonds. 

5.  Real  estate  mortgages; 

6.  Equipment  trusts; 

all  of  which  should  be  specified  in  detail  without  deduction 
of  bonds  owned  or  in  sinking  funds,  as  these  should  be  spe- 
cially shown  on  the  other  side  of  the  balance  sheet  as  al- 
ready stated.  Bonds  held  in  the  treasury,  issued,  but  not 
sold,  should  be  separated,  of  course,  from  bonds  held  in 
sinking  funds.  A  special  list  of  the  company's  funded  ob- 
ligations should  also  be  given  in  the  report,  showing  the  in- 
terest charges  on  each  kind  of  bond,  the  date  of  interest  pay- 
ment, and  the  date  of  maturity. 

Inasmuch  as  the  funded  debt  of  most  companies  consists 
chiefly  of  bonds  secured  by  mortgages,  on  the  whole  or  va- 
rious parts  of  the  system,  the  amount  of  such  bonds  per  mile 


36  THE  ANATOMY  OF  A  RAILROAD  REPORT 

of  road  is  a  very  important  consideration.  The  report 
should,  therefore,  contain  a  dear  statement  of  the  mortgage 
debt  per  mile  of  road,  showing  the  underl3'ing  liens  or  di- 
visional mortgages  separatel}^,  each  on  its  own  part  of  the 
road.  One  of  the  first  things  that  is  looked  at  in  beginning 
an  investigation  as  to  the  value  of  a  company's  securities  is 
the  amount  of  mortgage  and  bonded  debt  per  mile  of  road. 
Where  there  are  divisional  mortgages,  moreover,  it  is  very 
desirable  that  it  should  be  show^  what  they  cover,  because, 
although  the  guarantee  of  the  main  company  is  behind  them, 
it  is  found  in  practice  that  a  divisional  mortgage  that  is 
not  absolutely  secured  of  itself  is  not  much  more  secure  by 
reason  of  a  guarantee.  Experience  has  often  proved  that 
when  a  guarantee  is  required  to  be  made  good  it  is  found 
to  be  valueless.  Divisional  bonds  should,  therefore,  be 
judged  strictly  on  their  own  merits,  and  the  report  should 
supply  the  material  for  such  judgment. 

Where  there  are  collateral  trust  bonds,  there  should  be 
in  the  report  a  schedule  showing  the  collateral  securing  the 
bonds  in  detail,  and  the  revenue  from  the  securities  held  as 
collateral.  Very  few  roads  do  this,  although  the  informa- 
tion is,  in  reality,  vital ;  especially  when  a  road  is  in  difficul- 
ties. 

Dcheniure  bonds  unless  secured  by  mortgage  are  simply 
''^promises  to  pay"  and  have  no  special  lien  on  the  company's 
property.  They  differ  only  from  income  bonds  in  that  they 
promise  a  certain  amount  of  interest  at  stated  periods. 

Income  bonds  are  generally  a  species  of  hybrid  obligation. 
The  theory  is  that  they  shall  receive  interest  only  when 


THE  ANATOMY  OF  A  RAILROAD  REPORT  39 

earned,  and,  in  default  of  receiving  interest  when  it  is 
earned,  they  may  have  mortgage  rights.  Some  income 
mortgages  specify  the  deductions  permissible  from  net 
earnings  before  payment  of  income  interest,  but  the  ex- 
perience of  Reading  income  bondholders  shows  that  an  in- 
come mortgage  bond,  no  matter  how  carefully  the  mort- 
gage be  drawn,  is  little  if  any  better  than  a  preferred  stock. 
The  report  of  a  railroad  should  state  clearly  the  change 
in  company's  funded  debt  since  the  previous  report,  and  the 
reason  of  the  change.  Everything  pertaining  to  the  funded 
debt  of  a  company  is  important,  as  relating  to  the  extent  to 
which  the  property  of  stockholders  is  encumbered. 


Current  Liabilities. 

This  item  is  often  the  most  important  item  in  the  balance 
sheet  of  a  railroad,  and  is  always  one  of  the  first  things  to 
which  one  should  look  for  an  index  to  a  railroad's  condition. 
The  principal  items  which  fall  under  the  head  of  ^'current 
liabilities"  are  as  follows : 

1.  Loans  and  hills  payable; 

2.  Accounts  payable; 

3.  Pay-rolls  and  vouchers; 

4.  Interest  and  dividends  accrued; 

5.  Due  to  other  companies  (traffic  balances); 

6.  Sundry  liabilities. 

These  may  be  subdivided  into  strictly  ''operating  liabili' 
ties"  and  '' floating  debt."     The  distinction,  however,  from 


40  THE  ANATOMY  OF  A  RAILROAD  REPORT 

the  investor's  point  of  view,  is  one  without  a  great  deal  of 
difference,  although  some  roads  affect  to  draw  the  distinc- 
tion closely.  The  fact  is  that,  for  all  intents  and  purposes, 
all  the  items  shown  above  are  floating  debt. 

No  railroad  can  show  an  accurate  balance  sheet  without  a 
"floating  debt"  consisting  of  certain  operating  liabilities, 
because  it  is  physically  impossible  for  any  road  to  get  all  its 
liabilities  paid  up  at  once,  on  a  given  date.  The  operating 
liabilities,  however,  should  never  show  more  than  about  two 
months'  items.  When  a  railroad  allows  its  operating  ex- 
penses to  run  into  arrears  for  three  or  four  months  and 
they  thus  become  unduly  large,  there  is  surely  trouble 
ahead. 

Of  the  item  "loans  and  hills  payalU"  loans  generally 
represent  money  actually  borrowed  by  the  company. 
Usually  this  item  represents  one  of  two  things,  either  new- 
funded  debt  in  embryo,  or  trouble.  No  railroad  borrows 
money  on  its  notes  unless  it  has  construction  work  in  hand, 
which  calls  for  cash  when  it  is  inconvenient  to  sell  bonds, 
or  unless  it  needs  cash  for  dividends  or  interest  payments, 
pending  the  realization  of  some  of  its  current  assets.  Most 
railroads,  however,  do  carry  a  floating  debt  more  or  less  at 
the  time,  of  various  amounts.  Needless  to  say,  when  the 
amount  increases  steadily,  it  means  trouble.  Missouri  Pa- 
cific's floating  debt  was  an  example  of  a  funded  debt  in  em- 
bryo, steadily  increasing,  and  now  funded  into  collateral 
trust  bonds.  The  Erie  floating  debt  would  have  repre- 
sented embryo  funded  debt  but  that  the  company  could  not 
fund  it,  and  consequently  went  down  under  it. 


THE  ANATOMY  OF  A  RAILROAD  REPORT  41 

As  a  general  rule,  a  railroad  is  in  a  stron(i;er  position  if 
it  owes  no  "'loans''  or  ^'bills  ixujablcJ'  The  item  ''accounts 
payable'  is  not  so  serious,  representing  chiefly  money  owing 
for  supplies.  As  long  as  this  is  kept  within  reasonable 
bounds  it  is  not  significant,  being  an  operating  debt  which 
must  of  necessity  exist  for  a  time,  and  then  be  replaced  by 
another  debt,  representing  another  periodical  accumula- 
tion of  bills  awaiting  payment.  The  same  remarks  apply 
to  ''pay-rolls  and  vouchers''  and  ''traffic  balances"  repre- 
senting wages  of  employees,  audited  accounts  for  supplies, 
etc.,  similar  to  "accounts  payable;"  and  balances  due  to 
other  roads.  i\.s  long  as  these  are  moderate  in  amount,  they 
are  harmless,  and  an  entry  for  them  in  the  balance  sheet  is 
expected. 

The  item  "interest  or  dividends  accrued"  or  "declared 
payable"  should  be  offset  by  current  and  quick  assets  on 
the  other  side  of  the  balance  sheet.  This  item  should,  strictly 
speaking,  be  represented  by  cash.  A  road  is  badly  off,  as 
a  rule,  when  its  cash  or  quick  assets  are  not  a  good  deal  more 
than  its  accrued  interest  or  dividends  payable. 

''Floating  debt"  or  "current  liabilities"  may  take  other 
forms  than  those  given  above,  but  all  such  can  be  resolved 
into  one  of  three  classes  of  liabilities,  viz. : 

1.  Money  directly  borrowed; 

2.  Money  oived  for  various  purposes; 

3.  Money  due  in  a  short  time. 

All  debts  coming  under  these  heads  are  "current  liabilities" 
generically  known  as  "floating  debt." 

It  is  very  easy  to  see  when  a  company's  "current  liabili- 


42  THE  ANATOMY  OF  A  RAILROAD  REPORT 

ties'*  are  a  healthy  charge,  representing  the  play  of  its  ordi- 
nary operations.  Some  companies,  however,  make  a  prac- 
tice of  showing  only  the  net  balance  of  their  ''current  lia- 
hilities/'  and  ''current  assets/'  instead  of  showing  each  sep- 
arately. Inasmuch  as  it  is  the  gross  floating  debt  of  a  com- 
pany that  makes  trouble  (when  there  is  any)  and  not  the 
net  debt,  this  is  a  reprehensible  practice.  The  "current  lia- 
hilities''  and  the  "current  assets"  should  be  clearly  and  sep- 
arately stated,  each  on  its  own  proper  side  of  the  balance 
sheet. 

The  only  item  in  the  balance  sheet  to  which  reference  lias 
not  been  made  is  that  of  "profit  and  loss"  or  "surplus/' 
which  is  generally  found  on  the  liabilities  side.  It  should 
represent  an  actual  surplus,  but  unfortunately  it  is  seldom 
represented  by  anything  available  on  the  other  side,  after 
"current  liabilities"  are  satisfied. 


CHAPTER  III. 

Physical  Statistics. 

We  now  come  to  the  part  of  a  railroad  report  which  deals 
with  the  physical  details  of  operation.  We  need  to  know 
the  following  points  about  a  railroad : 

(1)  Length  and  characteristics  of  road; 

(2)  Nvmher  and  description  of  equipment; 

(3)  Volume  and  character  of  business  done  (all  kinds)  ; 
and  under  these  three  heads  can  be  brought  all  the  infor- 
mation necessary  to  a  fair  knowledge  of  a  railroad's  condi- 
tion. 

Length  and  Characteristics  of  Road. 

Practically  every  railroad  report,  worth  the  name,  con- 
tains a  special  statement  of  the  miles  or  road,  first,  second, 
third,  and  fourth  track,  and  sidings  owned  by  the  company, 
and  the  mileage  operated,  controlled,  and  leased,  or  in  any 
way  connected  with  the  company.  Railroad  accountants  are 
profuse  in  this  sort  of  information  as  a  rule,  as  it  "gives 
away"  very  little.  In  analyzing  a  report,  the  record  of  "av- 
erage miles  operated"  is  ordinarily  the  most  important  item, 
practically  speaking,  but  such  a  statement  as  that  indicated 
above  is  necessary.  The  miles  of  road  in  each  State  should 
also  be  stated. 

43 


44  ,  THE  ANATOMY  OF  A  RAILROAD  REPORT 

Few  railroads  give  in  their  report  the  ''characteristics'^ 
of  their  road,  even  in  a  condensed  form.  One  or  two  do  so 
in  an  imperfect  way.  There  is  no  reason  why  a  company 
should  not  show  in  its  report  the  percentage  of  curved  line, 
and  the  average  curve  per  mile,  the  number  and  average 
rise  of  grades,  and  the  total  length  of  bridges,  etc.,  stating 
stone,  wooden,  and  iron  separately.  This  could  be  done  in 
a  reasonable  space.  At  the  same  time  the  character  of  the 
rails  should  be  stated,  both  as  to  main  lines  and  sidings,  also 
the  character  of  ballast. 

This  would  give  a  fair  if  rough  idea  of  the  character  of 
the  road  in  question,  which  would  shed  light  on  other 
points.  The  information  described  is  in  the  possession  of 
all  railroad  companies,  and  they  could  very  easily  prepare 
it  for  their  stockholders.  A  little  diagram  showing  tlie 
profile  of  the  road  would  also  be  an  acceptable  addition. 
Such  diagrams  are  often  eloquent  and  illuminative. 

The  statement  of  track  mileage  owned  is  necessary  in 
some  detail.  A  second  track  is  a  great  factor  in  operating 
expenses,  as  are  sidings.  Obviously,  the  character  of  the 
rail  in  the  road  is  important  to  know.  It  needs  no  wizard 
to  predict  that  a  road  with  any  appreciable  proportion  of 
iron  rails  or  light  steel  rails  in  its  track  must,  before  long, 
spend  a  good  deal  of  money  for  heavy  steel  rails.  It  needs 
large  locomotives  running  on  heavy  rails  on  a  well-ballasted 
track,  to  make  any  money  on  present  rates  for  transporta- 
tion.   Hence  the  necessity  for  knowing  these  things. 

Systems  like  the  ^'Big  Four"  (C,  C,  C.  and  St.  L.), 
which  have  been  built  up  of  a  number  of  small  roads,  have 


THE  ANATOMY  OF  A  RAILROAD  REPORT  45 

found  themselves  obliged  in  recent  years  to  spend  a  great 
deal  of  money  in  putting  in  heavy  steel  rails,  and  replacing 
old  equipment,  to  meet  the  times.  If  sufficient  attention 
had  been  paid  to  this  point  by  investors  in  the  company, 
many  would  have  saved  themselves  considerable  money. 

The  report  should  state  also  the  total  length  of  wooden, 
stone,  and  iron  bridges  separately.  The  day  of  wooden 
bridges  is  rapidly  passing  away,  and  roads  which  have  not 
yet  replaced  them  with  stone  and  iron  must  soon  do  so. 
Hence  it  is  desirable  to  know  how  much  remains  to  be  done 
in  this  direction. 

Number  and  Description  of  Equipment. 

The  same  principles  apply  to  the  company's  equipment 
statement.  There  should  be  a  full  list  of  equipment,  show- 
ing the  number  of  locomotives,  and  their  average  weight  and 
age,  and  the  number  of  each  kind  of  car  owned  by  the  com- 
pany. As  regards  cars  the  statement  ought  to  show  the  gen- 
eral character  of  the  company's  equipment,  in  such  a  way 
that  the  stockholder  has  a  clear  idea  of  how  many  modern 
cars  of  large  capacity  the  company  owns,  how  many  old- 
fashioned  cars,  and  so  on.  The  condition  of  equipment, 
moreover,  at  the  date  of  the  report  ought  to  be  stated,  so 
that  a  clear  idea  can  be  gained  of  just  what  proportion  of 
equipment  is  fit  for  service,  what  proportion  is  unfit,  and 
what  proportion  is  totally  disabled.  This  information  ought 
to  be  given  in  such  a  way  as  to  enable  ready  and  close  com- 
parisoti  with  the  previous  3'ear's  report. 


46  THE  ANATOMY  OF  A  RAILROAD  REPORT 

In  short,  the  investor  ought  to  be  able  to  glean  from  a 
railroad  report  enough  infoimation  as  to  the  character  of 
the  company's  track  and  equipment  io  give  him  a  clear  men- 
tal picture  of  the  company  as  a  machine  ready  for  work. 
Especially  ought  he  to  be  able  to  judge  of  the  condition  of 
its  principal  parts  from  year  to  year,  and  whether  it  is  de- 
teriorating or  not,  for  want  of  attention  or  renewal. 


Volume  and  Character  of  Business  Done. 

Every  railroad  report  should  state  clearly  and  in  detail 
the  character  of  its  tonnage,  with  the  amount  and  percent- 
age of  each  kind  of  freight.  Curiously  enough,  a  good  many 
railroads  do  not  make  this  statement. 

Its  importance  is  so  obvious  as  scarcely  to  need  pointing 
out.  If  a  road  has  a  very  large  tonnage  of  a  given  product 
or  manufacture,  such  as  coal,  wheat,  corn,  iron,  or  so  on, 
it  is  subject  to  the  special  vicissitudes  attendant  upon  that 
tonnage.  Therefore  investors  should  have  clearly  in  mind 
the  general  character  of  the  business  of  their  company. 

It  must  be  remembered,  moreover,  that  the  character  of 
the  tonnage  has  a  great  bearing  on  the  average  revenue  per 
ton-mile  received  by  the  company,  and  will  often  explain  a 
change  in  the  latter. 

The  next  important  thing  to  know  is  the  ''traffic  den- 
sity,"  both  for  freight  and  passengers.  All  railroads  re- 
port the  number  of  tons  carried  one  mile  and  the  number 
of  passengers  carried  one  mile,  with  the  average  rate  re- 


THE  ANATOMY  OF  A  RAILROAD  REPORT  47 

ceived  per  ton  and  per  passenger.  To  obtain  tlie  ''freight 
density"  divide  the  ton  mileage  by  the  number  of  miles 
operated.  The  result  gives  tlie  number  of  tons  car- 
ried one  mile  per  mile  of.  road^  which  is  the  "freight 
densiti/."  The  same  process  gone  througli  with  the  passen- 
ger mileage  gives  the  ^'passenger  density.''  The  importance 
of  these  iigures  is  of  course  due  to  the  fact  that  they  show 
the  volume  of  business  done  by  the  road  very  closely,  and 
in  such  shape  that  ready  comparison  is  obtainable  with  any 
other  road. 

Almost  every  report  shows  the  total  train  mileage,  both 
as  to  freight  and  passengers.  The  importance  of  this  is  in 
the  volume  of  freight  and  number  of  passengers  carried 
on  an  average  in  each  train.  ^lany  reports  show  the  aver^ 
age  tons  and  passengers  per  train  mile,  but  most  do  not. 
These  iigures,  however,  can  be  found  by  dividing  the  tons 
and  the  passengers  carried  one  mile  by  the  freight  and 
passenger  train  mileage  respectively.  The  result  gives  the 
average  number  of  tons  carried  on  each  freight-train,  and 
the  average  number  of  passengers  carried  on  each  passen- 
ger-train. Ordinarily  the  report  should  show  the  average 
number  of  freight  cars  empty  and  loaded  in  each  freight- 
train,  and  of  passenger  cars  in  each  passenger-train,  and 
the  average  amount  of  freight  and  the  number  of  passen- 
gers in  each  car.  This  record  is  important,  as  showing  the 
character  of  the  management.  If  there  is  heavy  haulage  of 
empty  cars,  it  means  either  insufficient  equipment  or  poor 
management.  If  the  number  of  tons  per  train  is  small,  it 
argues  poor  locomotive  power,  insufficient  equipment,  bad 


48  THE  ANATOMY  OF  A  RAILROAD  REPORT 

grades,  or  else  bad  management.  The  report  should  con- 
tain materials  for  comparison  of  these  figures  from  year  to 
year.  They  are  extremely  important  as  an  index  to  the 
real  physical  condition  of  the  road. 

The  report  should  divide  the  business  of  the  company  into 
local  and  through  business,  and  it  would  also  be  well  to  in- 
dicate the  general  direction  of  the  company's  business,  viz., 
as  eastbound  or  westbound,  and  so  forth.  Local  business  is 
generally  the  best  paying,  and  a  company  with  a  large  local 
business  is  in  a  strong  position  as  a  rule. 

The  report  should  state  the  average  distance  that  each 
passenger  and  each  ton  of  freight  is  carried.  It  is  further- 
more advisable  to  have  a  statement  of  gross  earnings,  oper- 
ating expenses,  and  net  earnings  per  train  mile.  The  more 
detailed  the  statement  is,  the  more  valuable. 


General  Eemarks. 

There  have  now  been  enumerated  and  discussed  the  prin- 
cipal points  which  should  be  covered  in  a  railroad  report. 
Other  points  will,  of  course,  readily  suggest  themselves  to 
any  one  who  has  experience  of  railroad  reports.  The  gen- 
eral heads  given,  however,  comprise  what  the  investor  has 
a  right  to  expect.  The  more  clearly  and  fully  they  are  cov- 
ered the  better. 

The  fact  is,  however,  that  very  few  railroads  give  infor- 
mation upon  all  the  essential  points  enumerated,  especially 
as  regards  the  physical  condition  of  the  property,  and  its 


THE  ANATOMY  OF  A  RAILROAD  REPORT  49 

characteristics.  The  purely  financial  position  is  sufficiently 
well  covered  by  a  majority  of  the  companies.  Other  com- 
panies make  a  display  of  giving  much  information,  but 
what  is  given  is  often  found  upon  close  examination  to  be 
incomplete  and  insufficient. 

Suppose  that  a  company  gives,  in  each  of  its  annual  re- 
ports, information  upon  each  of  the  points  enumerated  in 
these  pages,  it  is  an  investor's  own  fault  if  he  is  caught, 
should  trouble  overtake  the  company.  It  is  simply  impossi- 
ble for  trouble  that  could  be  foreseen  to  overtake  a  company 
without  its  having  been  clearly  indicated  in  some  depart- 
ment of  its  report,  should  that  be  drawn  up  honestly,  and 
include  details  of  the  items  herein  referred  to. 

The  following  general  suggestions  are  offered  for  rough 
analysis  of  annual  reports  of  railroads.  It  is  impossible  to 
do  more  than  indicate  the  main  points,  for  each  case  must 
stand  by  itself  in  its  own  special  circumstances. 

Take  first  the  ''income  account"  of  the  company,  and 
set  down,  for  each  of  a  series  of  years,  the  total  gross  earn- 
ings, and  the  gross  earnings  per  mile  of  road  operated.  The 
longer  the  series  of  years  the  better.  If  there  should  be  a 
marked  change — and  if  there  is,  it  will  be  a  decrease,  for 
few  loads  in  this  country  have  very  greatly  increased  their 
gross  earnings  per  mile  as  compared  with  ten  years  ago — 
it  is  significant  generally  of  over-extension,  or,  if  there  be 
no  great  increase  in  mileage,  of  some  special  cause  affecting 
the  company's  business.  A  comparison  of  the  schedules 
showing  the  quantity  and  character  of  the  company's  ton- 
nage v/ill  throw  light  on  the  latter  case. 


50  THE  ANATOMY  OF  A  RAILROAD  REPORT 

The  percentage  of  operatiDg  expenses  to  gross  earnings 
is  the  next  irnportaDt  item  in  which  to  look  for  changes.  If 
there  be  an  increase,  it  may  be  for  one  or  more  of  many 
reasons.  Lower  rates  on  freight  and  passengers,  a  pre- 
ponderance of  low-class  freight,  insufficient  equipment,  in- 
ferior condition  of  roadbed,  bridges,  etc.,  absence  of  proper 
track  facilities,  bad  management  as  shown  in  large  empty- 
car  miileage ;  all  these  things  may  influence  the  ratio  of  oper- 
ating expenses,  and  a  change  needs  explanation. 

It  is  a  good  plan,  when  dealing  with  operating  expenses, 
to  compare  the  maintenance  items  year  by  year,  as  it  is  in 
these  that  the  fault  will  most  often  be  found.  Such  com- 
parison is  often  productive  of  good  results,  and  frequently 
discloses  something  of  importance. 

If  a  road  has  small  gross  earnings  per  mile  and  a  low 
ratio  of  operating  expenses,  it  is  natural  to  suspect  that  the 
road  is  not  being  fairly  maintained  out  of  expenses,  and  a 
close  scrutiny  of  maintenance  expenses  and  capital  account 
will  perhaps  show  the  secret.  If  the  non-maintenance  items 
of  operating  expenses  show  a  tendency  to  absorb  an  increas- 
ing percentage  of  the  whole,  the  probability  is  that  efficiency 
is  suffering. 

A  good  wa}^,  moreover,  to  check  the  various  details  of 
operating  expenses  is  to  calculate  the  locomotive  repairs  per 
mile  run,  and  the  repairs  of  roadway  per  mile  of  road  and 
per  ton  hauled.  This,  however,  is  only  necessary  when  oper- 
ating expenses  require  close  scrutiny,  and  is  chiefly  useful 
for  instituting  a  comparison  with  another  road. 

The  relations  of  net  earnings  (including  "other  income") 


THE  ANATOMY  OF  A  RAILROAD  REPORT  51 

to  fixed  charges  is  the  next  thing  to  investigate.  If  tlie 
gross  earnings  and  operating  expenses  do  not  disclose  any 
very  special  feature,  net  earnings  from  operation  will  not 
need  much  study  of  themselves.  The  source  of  "other  in- 
rome/'  however,  should  be  investigated  as  closely  as  pos- 
sible; it  may  mean  a  good  deal,  either  favorable  or  un- 
favorable. 

Obviously,  the  ratio  of  fixed  charges  to  net  income  is  a 
cardinal  feature,  and  any  change  therein  is  highly  impor- 
tant. It  is  desirable  to  reduce  both  to  a  ''per  mile"'  basis,  so 
as  to  admit  ready  comparison  with  other  roads  operating 
in  similar  territory.  Needless  to  say,  a  steady  increase  in 
the  ratio,  either  from  a  decrease  in  net  earnings  or  an  in- 
crease in  lixed  charges,  is  a  disquieting  feature  and  needs 
further  investigation.  If  there  is  no  increase  in  the  ratio 
there  is  nothing  wrong,  assuming  other  items  in  the  ''in- 
come  account"  to  have  successfully  passed  the  test  of  inves- 
tigation. 

If  the  value  of  a  bond  is  to  be  gleaned  from  the  reports 
of  a  company,  the  main  point  is  the  margin  of  net  income 
behind  the  interest  charges  on  that  income.  This  can 
easily  be  found. 

Supposing  that  the  '^ income  account'  passes  investiga- 
tion satisfactorily,  both  absolutely  (as  to  net  result)  and 
l)y  comparison  with  former  3'ears,  the  next  thing  to  inves- 
tigate is  the  ''balance  sheet."  Of  course,  anything  in  the 
income  account  that  needs  investigation,  as,  for  example, 
great  changes  in  the  operating  expenses,  other  income,  fixed 
charges,  etc.,  should  bo  at  once  followed  up  through  those 


52  THE  ANATOMY  OF  A  RAILROAD  REPORT 

parts  of  the  report  where  further  information  is  given  bear- 
ing on  those  items. 

The  ^'licMlities"  are,  in  a  sense,  the  most  important  side 
of  the  balance  sheet.  The  funded  debt  will  explain  any 
change  in  fixed  charges,  and,  if  it  does  not,  the  unfunded 
floating  debt  will  do  so.  The  movement  of  the  funded  debt 
over  a  series  of  years,  and,  particularly,  the  movement  of 
the  floating  debt,  are  important  to  note.  Needless  to  sa}^ 
the  causes  for  an  important  increase  of  one  or  the  other  are 
at  once  to  be  sought.  The  same  remarks  apply  to  an  in- 
crease of  capital  stock,  though,  of  course,  a  change  in  funded 
or  floating  debt  is  much  more  important,  as  involving  fixed 
and  serious  liability.  If  there  is  an  increase  of  liabilities, 
capital  or  current,  its  influence  on  the  assets  side  of  the 
balance  sheet  needs  very  careful  investigation. 

In  a  general  way,  the  principle  may  be  laid  down  that  an 
increase  of  current  Uahilities  should  be  represented  by  an 
increase  in  current  and  quicl:  assets,  unless  it  is  a  purely 
temporary  matter,  awaiting  only  the  issue  of  securities  for 
settlement.  Inasmuch  as  all  current  liabilities  are,  so  to 
speak,  pressing  and  immediate  liabilities,  it  is  of  great  im- 
portance that  the  corresponding  assets  be  available.  An  in- 
crease of  floating  debt  which  is  represented  by  uncollecti- 
ble accounts,  losses  on  leased  or  subsidiary  roads,  advances 
to  proprietary  companies,  efc.,  is  usually  a  bad  sign. 

Again  an  increase  of  current  liahilities,  represented  by 
an  increase  in  ''cost  of  road  and  equipment/'  is  unsatisfac- 
tory. In  fact,  whenever  there  is  a  floating  debt  of  any  con- 
sequence in  addition  to  the  ordinary  "operating  debt''  there 


THE  ANATOMY  OF  A  RAILROAD  REPORT  53 

is  need  of  close  scrutiny  of  the  circumstances  of  its  creation. 
It  ib  natural  for  a  road  to  owe  money  for  wages,  traffic  bal- 
ance, and  supplies,  etc.,  but  it  is  not  natural  for  it  to  borrow 
money  on  notes.  When  it  does  so,  the  reason  should  be  made 
clear. 

In  looking  at  current  assets,  "cash,"  "bills  receivable," 
and  "accounts  receivable,"  when  in  moderate  volume,  are 
to  be  assumed,  in  default  of  evidence  to  the  contrary,  to 
be  available  assets ;  as  also  are  "due  from  agents"  and  prob- 
ably "due  from  companies,  or  individuals,"  but  "advances 
to  other  companies,"  or  any  similar  item  should  be  ex- 
plained. Every  railroad  should  divide  its  current  assets 
into  ''quick  assets''  and  ''contingent  assets/'  and,  failing 
this,  the  first  duty  of  an  investor  is  to  make  this  division  for 
himself,  as  far  as  he  can,  from  the  items  as  given  in  the 
report. 

In  general,  current  items  on  each  side  of  the  account 
should  at  least  fairly  offset  each  other,  year  by  year.  At 
all  events  current  liabilites  should  not  greatly  exceed  cur- 
rent assets  without  very  good  and  sufficient  reason  being 
shown  therefor.  In  strict  theory,  probabl}^  current  and 
quich  assets  should  equal  current  liabilities,  and  the  sur- 
plus to  "profit  and  loss"  account  taken  together.  The  more 
nearly  this  standard  is  approached  the  better.  Unfortu- 
nately very  few  roads  have  a  real  or  available  "surplus/' 

The  changes  in  capital  or  mortgage  liabilities  should  b. 
found  in  capital  assets  as  corresponding  changes.  If,  in 
increase  or  funded  debt,  a  capital  stock  is  represented  by 
a  corresponding  increase  in  "cost  of  road  and  equipment/' 


54  THE  ANATOMY  OF  A  KAILROAD  REPORT 

the  additional  mileage  and  equipment  should  be  investi- 
gated carefully,  and  the  cost  thereof  compared  with  the 
cost  of  the  whole  as  closely  as  possible.  If  "investments  in 
stocTvs  and  bonds''  contain  a  large  portion  of  the  increase, 
the  stocks  and  bonds  acquired  should  be  separated  from  the 
rest  and  their  cost  estimated. 

All  leases  should  be  examined  as  to  whether  or  not  they 
are  profitable.  A  large  increase  in  ^'rentals''  in  fixed 
charges  will  of  course  show  in  the  income  account  and  will 
call  for  attention  in  the  examination  of  that  department. 
Even  if  there  is  no  increase  in  these  the  results  of  operations 
of  leased  roads  are  always  important.  More  often  than  not 
they  throw  much  light  on  the  value  of  ''investments  in 
stocks  and  honds/'  as  roads  leased  are  also  frequently  con- 
trolled by  ownership  of  a  majority  of  the  capital  stock. 

In  short,  any  important  change  on  either  side  of  the  bal- 
ance sheet  needs  explanation  by  a  close  examination  of  the 
corresponding  changes  on  the  other  side,  by  a  "translation," 
so  to  speak,  of  the  items.  As  already  said,  if  railroad  re- 
ports were  perfect  they  would  need  no  translation  or  analy- 
sis. 

In  examining  the  physical  statistics  and  the  results  of 
operation,  the  growth  of  the  business  of  the  company  as 
shown  in  its  ''freight  density"  and  "passenger  density" 
should  be  observed;  as  also  any  radical  change  in  the  char- 
acter of  the  tonnage  carried,  the  average  train  load,  the 
average  haul  per  ton  and  per  passenger,  and  the  average 
rates  per  ton  per  mile  and  per  passenger  per  mile.  As  il- 
lustrating the  efficiency  of  the  trackage  accommodation  the 


THE  ANATOMY  OF  A  RAILROAD  REPORT  5o 

loaded  and  empty  car  mileage  is  important.  Any  impor- 
tant changes  in  the  revenue  and  expenses  per  train  mile 
will  have  shown  itself  in  the  income  account  in  gross  earn- 
ings and  operating  expenses,  but  additional  information  is 
desirable  on  the  point.  The  average  efficiency  of  each  loco- 
motive in  miles  run,  and  of  each  car  in  tons  carried,  is  a 
good  thing  to  watch  from  j^ar  to  year ;  while,  of  course,  the 
proportion  of  equipment  unfit  for  service  is  to  be  carefully 
noted  from  year  to  year,  as  a  guide  to  the  sufficiency  of  main- 
tenance. 

The  gradual  conversion  of  light  rails  into  heavy  rails, 
the  improvement  of  ballast,  the  conversion  of  wooden 
bridges  into  stone  and  iron,  the  reduction  of  grades,  the 
straightening  of  curves;  all  these  are  things  which  are  a 
necessary  concomitant  of  successful  railroad  operation  in 
these  days,  and  progress  therein  should  be  carefully  noted. 

The  proportion  of  ^^local''  to  "through"  business  must 
be  watched  as  having  a  bearing  on  rates  and  operating  ex- 
penses. Mileage  of  foreign  cars  throws  light  on  the  suffi- 
ciency or  insufficiency  of  equipment  owned.  A  hundred 
other  points  will  suggest  themselves  to  any  one  who  has 
a  great  deal  of  experience  in  the  study  of  railroad  reports. 
The  number  of  possible  combinations  of  information,  all 
of  which  are  productive  of  fresh  light  on  the  whole,  is  al- 
most infinite.  We  have  enumerated  only  a  few  of  the  most 
obvious. 


TOJ^-MILE  COST. 


TON-MILE  COST. 


INTRODUCTORY. 

In  the  short  series  of  chapters  which  is  here  begun,  an  at- 
tempt will  be  made  to  set  down  and  illustrate  some  of  the 
main  principles  governing  the  transportation  of  freight  by 
railroads  in  the  United  States.  The  primary  object  is  to 
convey  a  clear  idea  of  what  is  meant  by  the  ^Ton-mile/'  the 
^'Train-mile;''  the  ''Unit  of  service/'  the  ''Unit  of  product/' 
and  the  various  other  words  and  phrases  commonly  used  to 
designate  the  main  facts  and  things  in  the  Railroad  indus- 
try. The  secondary  object  is  to  indicate  the  relations  of 
these  things  to  one  another  with  the  view  of  outlining  the 
principal  factors  governing  the  economy  of  the  industry. 

The  matters  to  be  discussed  constitute  what  is  really  the 
most  important  branch  of  the  analysis  of  general  railroad 
results,  for  they  deal  in  the  main  with  questions  of  cost, 
which  necessarily  determine  net  earnings  and  profits.  In 
quite  another  sense,  however,  these  matters  may  prove  of  in- 
terest to  practical  railroad  men,  for  they  are,  in  a  measure, 
the  theory  of  their  practice.  Experience  shows  that  com- 
paratively few  practical  men  know  very  much  about  the 
theory  of  their  industry,  consequently  it  may  profit  to  deal 
with  it  in  a  purely  theoretic  way,  touching  only  very  super- 
ficially upon  matters  of  practice. 

To  those  whose  business  it  is  to  canvass,  weigh  and  ex- 

59 


60  TON-MILE  COST 

amine  railroad  results,  a  fairly  clear  perception  of  first  prin- 
ciples is  almost  essential,  for  the  evidence  upon  which  judg- 
ments have  to  be  made  is  of  such  a  nature  as  to  be  thor- 
oughly intelligible  only  by  the  light  of  these  principles.  Rail- 
road analysis  is,  after  all,  little  more  than  a  series  of  com- 
parisons, but  the  possibilities  of  error  and  fallacy  in  the 
process  of  comparisons  are  multitudinous  unless  the  way  is 
guarded  by  a  general  knowledge  of  the  basis  upon  which 
comparisons  can  alone  be  correctly  made.  An  attempt  is 
made  to  indicate  this  basis  in  a  general  way. 

No  originality  is  claimed  for  the  form  of  the  inquiry  or 
the  scheme  upon  which  it  is  founded.  The  late  Mr.  Albert 
Fink,  as  far  back  as  1873,  laid  the  lines  upon  which  practi- 
cally all  scientific  railroad  thought  has  since  proceeded.  We 
have  followed  these  lines  as  closely  as  may  be.  Those  who 
are  curious  to  see  how  closely,  are  referred  to  the  annual 
report  of  Lomsville  &  Nashville  for  the  year  1873-74. 


CHAPTER  I. 

The  Fnit  of  Transportation". 

Transportation  is  the  act  of  conveying  something  or 
some  one  over  a  certain  distance.  It  is  a  comhination  of 
quantity  aud  distance,  and  is  therefore  an  abstraction  whicli 
we  may  denote  by  the  mathematical  phrase : 

Transportation  =  Quantity  X  Distance. 

Using  the  customary  nnits  of  quantity  and  distance  we  have 
the  units  of  the  two  kinds  of  transportation,  thus : 

Passenger  Transportation  =  Passenger  X  Mile. 
Freight   Transportation  =  Ton  X  Mile. 

Or,  as  we  may  for  convenience  denote  them,  "•passenger- 
miles"  and  "ton-miles.''  These  are  the  units  of  transporta- 
tion, and  no  other  units  are  possible,  unless  multiples  of 
passengers  or  tons,  or  multiples  of  miles. 

The  passenger-mile  is  an  abstraction,  because  it  does  not 
exist  except  as  an  arbitrary  mental  concept.  The  same  is 
true  of  the  ton-mile.  Yet  both  are  real  and  true  measures 
of  transportation,  wliereas  neither  of  the  component  parts 
is  alone  a  measure. 

Transportation  is  sold  to  the  public  practically  in  these 
units,  although  they  are  stated  in  a  slightly  different  way, 
at  least  as  far  as  freight  is  concerned.  There  may  be  laid 
down  as  general  principles  that — 

61 


62  TON-MILE  COST 

The  price  of  iMssenger  transportation  per  passenger  va- 
ries directly  with  the  distance  traveled,  leaving  urban,  subur- 
ban and  interurban  traffic  out  of  consideration ;  and  that  — 

The  price  of  freight  transportation  per  article  varies 
largely  according  (1)  to  the  character  of  freight;  (2)  to 
the  qua?itiiy  offered  at  a  given  time  for  transportation ;  and, 
these  things  being  equal,  (3)  it  varies  with  the  distance  to 
which  freight  is  transported. 

Consequently  the  average  passenger-mile  revenue  tends  to 
constancy  on  a  given  road  over  a  given  time,  and  should 
not  vary  greatly  on  two  given  roads  in  similar  localities. 
In  other  words,  the  factors  composing  it  tend  to  constancy. 

The  average  ton-mile  revenue,  however,  may  vary  exceed- 
ingly, and  does  so  var}^,  not  merely  upon  one  road  as  com- 
pared with  another,  but  upon  one  road  as  compared  with  it- 
self in  previous  years.  For  instance,  the  first  factor  which 
determines  it  is  capable  of  almost  infinite  variety.  The 
different  kinds  of  freight  offered  for  transportation  are  al- 
most innumerable,  and  each  kind  has  practically  a  rate  of 
its  own,  at  some  time  or  another.  Efforts  are  constantly 
being  made  to  classify  freight  so  as  to  reduce  the  number 
of  different  rates  and  simj^lify  the  making  of  rates.  A  uni- 
form classification  has  been  found  impossible  for  various 
reasons.  It  may  be  said,  however,  that  in  fixing  rates  the 
first  step  is  to  consider  the  character  of  the  freight,  and 
charge  it  partly  according  to  its  value,  but,  in  the  main, 
to  charge  the  traffic  with  what  it  will  fairly  bear. 

The  three  main  factors  in  the  making  of  a  rate  are  prob- 
ably: 


TOX-INIILE  COST  03 

1.  Consideration  of  general  cost  of  service  involved. 

2.  Consideration  of  competitive  requirements. 

3.  General  consideration  of  value  of  service  rendered, 
with  reference  to  value  of  freight,  etc. 

The  first  factor  involves  bulk  of  freight,  terminal  ques- 
tions, handling  en  route,  etc.  While,  for  reasons  that  will  be 
apparent  later,  it  is  almost  impossible  to  determine  in  ad- 
vance the  cost  of  hauling  given  freight,  it  is  possible  to  de- 
termine greater  cost  in  some  cases  than  in  others. 

The  second  factor  may  often  be  of  extreme  importance, 
as,  for  example,  in  the  matter  of  rates  on  export  grain,  etc., 
and  it  probably  cuts  a  larger  figure  in  the  making  and 
changing  of  rates  from  time  to  time  than  does  any  other 
factor. 

The  third  factor  applies  in  a  general  way  to  all  rates 
originally,  and  is  probably,  in  theor}^,  the  principal  factor, 
by  reason  of  the  impossibility  of  establishing  in  advance 
scientifically  accurate  measures  of  cost  per  ton  or  per  ton- 
mile. 

Consequently,  without  going  at  length  into  the  question 
of  how  transportation  prices  are  originally  fixed,  it  is  neces- 
sary to  note  that  these  prices  may  be  the  product  of  several 
factors  originally,  one  factor  being  perhaps  predominant 
at  one  time,  and  another  at  another  time,  generally  more 
than  one  factor  being  operative. 

It  is  right,  for  example,  to  charge  specie  a  much  higher 
rate  than  coal,  although  in  practice  specie  is  more  con- 
venient and  economical  to  handle.  A  car-load  of  specie 
may  pay  more  for  transportation  than  a  train-load  of  coal, 


64  TON-MILE  COST 

and  fairly  so.  A  train-load  of  liigli-class  furniture  will  pay 
more  than  a  train-load  of  iron  castings  or  pig  iron  for  the 
same  reason.  Again,  business  involving  large  terminal  ex- 
penses will  pay  more  than  business  not  involving  such  ex- 
pense. 

Then,  practically  all  tariffs  provide  a  higher  rate  for 
freight  oifered  in  "less  than  car-load  lots"  (L.  C.  L.) 
than  the  same  freight  in  "car-load  lots"  (C.  L.)  for  obvious 
reasons.  Anything  tending  to  decrease  the  number  of  large 
shipments  and  increase  the  number  of  small  shipments  of 
the  same  class  of  freight  will  tend  to  increase  the  average 
ton-mile  revenue  from  such  freight,  although  there  may  be 
no  change  in  the  number  of  ton-miles. 

Again,  it  has  been  said  that  character  and  quantity  of 
freight  being  equal,  the  price  of  transportation  per  article 
varies  more  or  less  as  the  distance  to  which  it  is  carried. 
This,  while  true  in  a  general  sense,  is  not  true  in  a  mathe- 
matical sense.  For  example,  according  to  the  Illinois  sched- 
ule of  maximum  freight  rates,  we  find  the  following  maxi- 
mum charge  prescribed  for  the  carriage  of  wheat  (in  cents 
per  100  pounds)  : 

25  miles  5.43  cents 

50  miles  6.76  cents 

100  miles  8.91  cents 

200  miles  11.58  cents 

500  miles 15.59  cents 

From  this  it  appears  that  while  more  is  charged  for  the 


TON-MILE  COST  65 

carriage  of  wheat  for  long  distances  than  for  short  distances, 
the  additional  cost  by  no  means  represents  or  coincides  with 
the  additional  mileage  in  a  mathematical  way.  All  that  can 
be  said  is  that  the  longer  the  haul  the  greater  the  cost  per 
ton.  The  law  governing  Interstate  Commerce  prevents  a 
greater  charge  being  made  for  a  longer  than  for  shorter  haul. 
The  greater  the  distance,  however,  the  smaller  will  be  the 
ton-mile  revenue.  In  the  above  table,  for  example,  the  ton- 
mile  revenue  (1  ton,  2,000  pounds)  on  wheat  carried  50 
miles  is  2.7  cents;  on  wheat  carried  100  miles  it  is  1.78 
cents;  on  wheat  carried  200  miles  it  is  1.15  cents,  and  on 
wheat  carried  500  miles  it  is  0.62  cents. 

Consequently,  other  things  being  equal,  ton-mile  revenue 
will  vary  inversely  to  the  length  of  haul.  A  road  carrying 
1,000,000,000  ton-miles  and  carrying  5,000,000  tons  an 
average  of  200  miles  each  will  show  a  lower  ton-mile  reve- 
nue than  a  road  carrying  the  same  number  of  ton-miles,  but 
transporting  8,000,000  tons  an  average  distance  of  125 
miles  each,  supposing  the  character  of  tonnage  to  be  exactly 
the  same  in  both  cases.  This,  as  will  be  seen  later,  is  fair, 
as  the  cost  of  handling  the  smaller  tonnage  with  long  haul 
is  less  than  that  of  handling  the  larger  tonnage  with  shorter 
haul. 

Summarizing,  therefore,  we  find : 

(1)  That  the  price  of  passenger  transportation  per  unit 
tends  to  remain  constant,  no  matter  whether  a  large  or  small 
quantity  of  units  he  taken;  and  (2)  that  the  price  of 
freight  transporlation  per  unit  lends  to  vary  directly  with 
the  quality  or  character  of  freight  offering  and  inversely 


66  TON-MILE  COST 

to  the  quantity  of  units  taken,  being  proportionately  less 
for  car-load  lots  and  long  distances. 

It  is  fair  to  say  that  in  passenger  transportation  there  is 
a  tendency  toward  a  reduction  of  prices  for  large  quantities. 
as  is  seen  in  the  case  of  excursions,  party-rates,  etc.  On  the 
whole,  however,  the  above  principle  holds  good.  The  evi- 
dence of  its  truth  is  seen  in  the  comparatively  slight  varia- 
tions in  average  passenger-mile  rates  from  year  to  year. 

The  average  passenger-mile  revenue  on  a  given  road  is 
the  product  of  comparatively  few  factors.  The  State  may 
have  prescribed  certain  mileage  rates,  as,  for  example,  not 
more  than  two  cents  per  mile,  and  unless  the  road  is  doing 
a  large  suburban  and  commuters'  business  the  tariffs  will 
be  made  substantially  on  the  basis  of  passenger-miles 
traveled  and  the  passenger-mile  revenue  will  tend  to  con- 
stancy.    Not  so,  however,  with  freight. 

The  average  ton-mile  revenue  will  be  the  product  of 
many  factors,  as  has  been  seen  in  the  foregoing  remarks. 
First,  there  may  be  changes  in  the  character  of  commodi- 
ties offered  for  transportation  between  one  year  and  an- 
other. Second,  there  may  be  changes  in  the  average  in- 
dividual quantity  of  freight  offered.  The  size  of  the  aver- 
age consignment  of  freight  is  a  factor  in  determining  both 
ton-mile  revenue  and  ton-mile  cost,  and  might,  with  ad- 
vantage, be  stated  by  railroads  in  their  annual  reports. 
Third,  there  may  be  changes  in  the  average  distance  to 
which  freight  is  transported.  Fourth,  there  may  be  actual 
changes  in  the  prices  of  transportation,  measured  by  units, 
as  compared  with  previous  years.    One  year  may  be  marked 


TON-MTLE  COST  67 

by  stable  rates,  anqtlicr  by  a  rate  war  and  low  rates.  Fiftli, 
prices  of  freight  transportation  vary  in  different  sections, 
which  must  be  remembered  in  comparing  one  road's  results 
with  those  of  another.  Lastly,  the  proportion  of  through 
freight  (i.  e.,  freight  that  is  received,  hauled  and  delivered 
to  another  line  without  breaking  bulk  or  handling  at  ter- 
minals) may  vary  one  3^ear  with  another.  Such  freight 
goes  at  lower  rates  than  freight  which  requires  handling  at 
terminals,  because  it  is  less  expensive  to  handle. 

All  these  things  have  to  be  canvassed  in  comparing  ton- 
mile  results,  especially  ton-mile  revenues  of  one  road  with 
those  of  another.  It  cannot  be  too  clearly  stated  that  with- 
out such  canvass  comparisons  are  meaningless,  and  would 
be  no  more  valuable  than  would  be  comparisons  of  prices 
of  a  yard  of  silk  and  a  yard  of  cotton,  without  stating  the 
essential  difference  in  the  character  of  the  fabric.  For  this 
reason,  all  the  information  that  can  possibly  be  given  by  a 
railroad  on  the  above  heads  is  of  great  interest  and  im- 
portance to  any  one  desirous  of  drawing  conclusions  from 
the  final  figures. 

For  the  purpose  of  this  investigation  (which  mainly  con- 
cerns itself  with  the  cost  of  transportation)  questions  re- 
garding the  prices  of  transportation  may  be  taken  as  set- 
tled. We  commence,  therefore,  with  the  existing  tariff 
schedules,  without  inquiring  into  the  circumstances  of  their 
creation  further  than  to  show  in  a  general  way  where  they 
bear  upon  the  question  of  cost. 


CHAPTEK  II. 

The  Units  of  Eailroad  Service. 

In  practically  no  industry  known  to  civilization  to-day  is 
the  unit  of  product  also  the  unit  of  service  or  work  done, 
or  is  it  the  unit  of  cost.  Complicated  machinery  and  the 
division  of  labor  are  the  main  reasons  for  this.  The  greater 
the  complexity  in  the  process  of  manufacture,  the  further 
removed  is  the  unit  of  product  from  the  unit  of  work  done, 
or  the  unit  of  cost. 

It  is  very  evident,  therefore,  that  in  the  industry  of 
Transportation  neither  the  ton-mile  nor  the  passenger-mile 
is  a  unit  of  work  or  service,  nor  is  either  in  any  way  a  unit 
of  cost,  for  it  is  clear  upon  a  moment's  thought  that  the  ton- 
mile  and  the  passenger-mile  may  contain  much  more  labor 
or  energy  on  one  road  than  on  another,  and  upon  the  same 
road  at  one  time  than  at  another,  and  consequently  the 
energy  necessary  for  their  production  is  by  no  means  con- 
stant. They  cannot  therefore  be  units  of  work,  service  or 
cost. 

It  is  evident,  however,  that  if  there  be  a  unit  of  railroad 
service,  that  unit  must  have  some  correspondence  with  the 
unit  of  product,  which,  as  has  been  shown,  consists  of 
"quantity  distance."  If,  in  place  of  "quantity,"  wn  write 
'Vehicle"  as  containing  the  quantity,  the  formula 

Vehicle  X  Distance 

should  give  as  good  a  unit  of  service  a^  is  obtainable.    The 

r,8 


TON-MILE  COST  69 

running  of  trains  is  a  railroad's  cliaracleristic  act,  and  is 
all  that  is  (in  theory)  necessary  for  the  production  of  trans- 
portation. Transportation  is  produced  only  by  the  run- 
ning of  trains,  and  consequently  "train-distance'"  or  ''train- 
mile"  is  the  unit  of  transportation  service  performed  by  a 
railroad.     This  requires  a  definition  of  a  train. 

Generally  speaking,  a  train  consists  of  a  certain  (vari- 
able) number  of  vehicles  or  cars,  with  one  or  more  loco- 
motives, requiring  a  certain  force  of  men  for  its  conduct. 
Considering  more  especially  freight  trains,  a  freight  train 
will  have,  say : 

One  or  more  locomotives, 

A  certain  number  of  freight  cars, 

One  caboose  car; 
and  the  forte  required  for  its  conduct  will  be  generally: 

Locomotive  engineer  and  fireman. 

Conductor, 

Two  brakemen, 

Flagman ; 
in  all,  six  persons.  As  thus  constituted,  a  train  is  a  specific 
entity,  which  practically  does  not  vary  on  one  road  from 
another.  It  is  not  necessary  to  prove  that  the  '^car-mile" 
cannot  be  a  unit  of  service,  because  the  number  of  cars  to  a 
train  may  vary  considerably  without  any  variation  (other 
than  that  of  car  repairs)  in  the  work  done  or  the  cost  en- 
tailed, and  therefore  the  quantity  of  energy  spent  per  car- 
mile  does  not  tend  to  constancy.  On  the  other  hand,  the 
quantity  of  energy  spent  per  train-mile  does  tend  to  con- 
stancy. 


70  TON-MILE  COST 

In  practice,  however,  a  train  may  have,  and  frequently 
does  have,  more  than  one  locomotive  to  help  it  over  grades, 
etc.  This  materially  affects  the  item  of  cost,  and  tends  also 
to  impair  somewhat  the  value  of  the  train-mile  as  a  unit 
of  service.  Nevertheless,  it  is  evident  that  while  the  train- 
mile  is  not  a  perfect  unit  of  actual  service,  it  is  the  best 
unit  that  can  be  conceived. 

A  train,  therefore,  consists  of  one  or  more  locomotives 
wdth  crews,  and  a  certain  number  of  cars,  passenger  or 
freight,  with  a  crew,  and  train-mileage  is  best  measured  by 
the  miles  traveled  by  train  crews.  This  mileage  is  called 
^'"revenue"  train-mileage,  to  distinguish  it  from  "work" 
train-mileage,  or  "switching"  mileage  made  in  yards  or 
terminals,  when  the  train  is  being  made  up  by  the  as- 
sembling of  its  parts.  A  railroad  begins  to  produce  trans- 
portation when  it  starts  making  revenue  train-mileage,  and 
only  then  does  it  begin  to  earn  money.  All  other  work 
done  by  a  railroad  is  of  a  preparatory  character,  and  is  not 
directly  remunerative,  though  it  may  be  very  costly,  as  will 
be  seen  later. 

We  have  shown  that  the  train-mile  is  the  unit  of  railroad 
service,  just  as  the  blow  of  a  steam  hammer  is  its  charac- 
teristic act,  and  the  unit  of  service  performed  by  it.  There 
are,  however,  steam  hammers  and  steam  hammers,  and  the 
efficiency  of  blows  given  by  steam  hammers  may  vary 
greatly.  The  efficiency  of  a  train-mile  may  vary  on  one 
road  as  compared  with  another,  and  one  road  at  one  time 
as  compared  with  itself  at  another  time.  In  other  words, 
a  train-mile  may  produce  more  transportation  at  one  time 


TON-MILE  COST  71 

than  another,  and  on  one  road  than  another.  This,  how- 
ever, is  only  to  say  that  the  product  of  the  unit  of  service 
is  not  constant,  and  that  the  productive  power  of  the  energy 
expended  varies  at  one  time  as  compared  with  another. 
The  amount  of  energy  expended,  however,  as  measured  by 
labor  and  material,  in  the  production  of  a  train-mile  tends 
to  constancy  on  a  given  road. 

It  is  found  in  practice  that  the  expenditure  of  labor  and 
material  per  engine-mile  does  not  vary  materially.  It  makes 
little  difference  in  this  respect,  within  certain  limits,  how 
many  cars  are  hauled  by  the  engine.  This  precludes  the 
use  of  the  car-mile  as  a  unit  of  service  or  work  done.  The 
use  of  helping  engine-mileage,  of  course,  increases  the 
amount  of  work  done,  and  has  to  be  allowed  for.  A  road, 
moreover,  which  has  very  heavy  grades  and  sharp  curves 
must  use  more  power  to  perform  a  given  amount  of  trans- 
portation service  than  a  road  which  has  light  grades.  This 
may  involve  extra  engine-mileage,  or  it  may  involve  a  great- 
er expenditure  of  power  per  engine-mile. 

Again,  passenger  train-mileage  is  relatively  less  expen- 
sive than  freight  train-mileage,  partly  because  it  is  per- 
formed more  rapidly,  thus  involving  less  waste  of  fuel  or 
labor,  and  partly  because  it  involves  less  expenditure  of 
labor  for  train-crews,  as  a  general  rule.  A  passenger 
train-mile  requires  fewer  hands  than  a  freight  train-mile, 
and  passenger  cars  and  passenger  locomotives  will  make 
more  mileage  in  a  year  than  will  freight  cars  and  freight 
locomotives,  measured  per  car  and  locomotive. 

Now,  while  it  is  evident  that  the  train-mile  is  the  unit 


72  TOisr-ierrLE  cost 

of  service  in  the  transportation  industry,  there  is  done  by 
every  railroad  a  vast  quantity  of  work,  either  preparatory  to 
or  in  completion  of  the  task  of  actual  transportation,  which 
cannot  be  measured  by  the  train-mile.  For  example,  term- 
inal service  can  hardly  be  measured  by  the  train-mile; 
maintenance  of  way  (except  certain  items)  is  independent 
of  train-mileage;  repairs  of  buildings,  fences,  docks,  shops, 
machinery  certainly  have  no  correspondence  with  the 
amount  of  train-miles  run.  As  will  be  seen  hereafter,  dif- 
ferent factors  govern  these  items.  In  considering  the. ser- 
vice unit,  it  is  clear  that  all  this  kind  of  work  is  of  a  nature 
preparatory  or  preliminary  thereto.  The  factors  that  gov- 
ern it  have  practically  no  direct  reference  to  transportation. 
This  is  equivalent  to  saying  that  the  unit  of  service  for 
work  done  cannot  be  looked  upon  either  as  a  complete  or 
perfect  unit  of  service,  or  as  a  possible  unit  of  cost.  There 
is  only  one  unit  of  actual  transportation  service  performed, 
but  there  are  several  kinds  of  service  performed  in  con- 
nection with  transportation,  and  several  units  of  cost.  Now, 
if  we  remember  that  there  may  be  an  almost  infinite  variety 
in  the  number  of  units  of  transportation  contained  in  each 
unit  of  service,  it  is  clear  that  determination  of  the  cost 
per  unit  of  transportation  furnished  is  a  very  complicated 
matter,  involving  many  factors  not  materially  interdepend- 
ent. Yet  the  whole  theory  of  transportation  depends  upon 
determination  of  the  cost  per  unit  sold.  In  order,  there- 
fore, to  determine  the  factors  that  govern  the  economy  of 
transportation  we  have  to  start  with  the  following  propo- 
sitions : 


TON-MILE  COST  73 

(1.)  The  selling  price  of  passenger  transportation  tends 
to  constancy  on  a  given  road  and  in  a  given  section. 

(2.)  The  selling  price  of  freight  transportation  varies 
directhj  as  the  character  of  freight  transported  and  in- 
versely to  tJie  c/uantity  of  transportation  furnished  at  one 
time. 

(3.)  The  amount  of  energy  directly  employed  in  the 
unit  of  service  or  worh  done  tends  to  constancy. 

(4.)  The  amount  of  energy  employed  in  preparation  for 
the  unit  of  service  varies  ivithout  reference  to  the  number 
of  units  of  service  performed,  or  the  efficiency  of  these  units. 

(5.)  The  cost  of  the  unit  of  transportation  sold  depends 
(a)  upon  the  number  of  jinits  of  transportation  in  each 
unit  of  service  or  ivorh;  {b)  upon  the  quantity  of  work 
done  preparatory  or  preliminary  to  the  unit  of  service  and 
the  cost  of  this  ivork. 

It  must  be  remembered  that  nowhere  in  this  investigation 
is  it  possible  to  deal  in  a  mathematically  exact  manner  with 
the  questions  involved,  owing  to  the  complicated  structure 
of  the  industry.  We  are  compelled  to  deal  all  the  while 
with  approximations,  and  exceptions  can  be  found  to  prac- 
tically every  rule.  Dividing  lines  must  be  elastic,  and  allow- 
ances made  in  all  cases.  The  best  that  can  be  done  is  to 
indicate  the  general  rules  and  factors  governing  the  theory 
of  transportation,  bearing  in  mind  that  these  rules  must  not 
be  construed  as  unalterable,  or  these  factors  as  mathe- 
matically exact. 


CHAPTER  III. 

The  Units  of  Railroad  Cost. 

Railroad  service  clearly  falls,  as  has  been  shown,  in  one 
of  two  divisions  or  classes,  viz.,  actual  performance  of  trans- 
portation or  preparation  therefor.  In  determining  the 
units  of  cost  and  the  factors  that  govern  those  units,  we 
have  come  to  consider,  in  a  general  way,  what  a  railroad  does 
for  the  money  it  earns.  This  money,  it  must  be  remem- 
bered, is  received  in  return  for  passenger-miles  and  ton- 
miles  sold  to  the  public. 

In  the  first  place  a  railroad  maintains  a  very  costly  plant, 
consisting  of  roadbed,  bridges,  tunnels,  embankments,  cut- 
tings, etc.,  and  locomotives  and  cars,  with  shops,  machinery, 
etc.,  necessary  to  maintain  the  equipment.  This  plant  act- 
ually produces  the  transportation. 

In  the  second  place  it  maintains  very  costly  terminals, 
depots  and  stations  for  receiving  passengers  and  freight 
before  transporting  them,  and  for  distributing  them  at 
the  end  of  their  journey.  It  has  important  and  expensive 
freight  yards  for  the  classification  of  freight  and  making 
up  of  trains,  designed  to  secure  economy  and  efficiency  in 
train-mileage.  Plants  and  structures  of  this  kind  do  not 
actually  produce  transportation,  but  merely  smooth  the  way 
and  prepare  for  its  production. 

In  the  third  place,  it  employs  a  large  force  of  men  to  col- 

74 


TOX-MILE  COST  75 

lect  freight  and  passengers  and  secure  business  for  the 
road ;  it  employs  superintendents  who  supervise  the  work  in 
all  departments;  it  has  watchmen  to  insure  the  safety  of 
tlie  public  on  grade  crossings,  etc. ;  it  operates  a  telegraphic 
service  in  connection  with  its  work ;  it  may  operate  a  marine 
equipment  for  lighterage,  etc.,  or  for  ferry  service;  and  a 
thousand  and  one  other  things  it  may  do  in  connection  with 
its  business  that  cannot  be  classified  or  set  down  here.  In  a 
Avord,  a  railroad's  work  may  be  almost  universal  in  char- 
acter apart  from  the  actual  furnishing  of  transportation. 

It  is  evident,  from  this  general  statement,  that  there  is  no 
such  thing  as  a  single  unit  of  cost  in  the  transportation 
industry.  An  almost  infinite  number  of  factors  enter  into 
the  cost  of  work  done  preparatory  and  preliminary  to  the 
actual  furnishing  of  transportation.  In  endeavoring,  there- 
fore, to  determine  the  nearest  units  of  cost,  we  have  to  deal 
with  a  highly  complicated  organization,  and  hard  and  fast 
rules  cannot  be  laid  down. 

x\t  the  outset,  however,  we  have  two  main  divisions  of 
work  done,  viz.,  that  done  in  the  production  of  train-mile- 
age, and  that  done  preparatory  and  complementary  to  the 
production  of  train-mileage.  Operating  expenses  natu- 
rally fall  under  two  main  heads,  according  to  this  classifi- 
cation, viz.,  expenses  contingent  upon  train-mileage  as  dis- 
tinguished from  expenses  not  so  contingent.  We  need  not 
at  this  stage  consider  the  apportionment  of  expenses  between 
freight  and  passenger  business,  as  it  is  not  necessary  for 
our  present  argument. 

Dealing  first  with  expenses  contingent  upon  train-mile- 


76  TON-MILE  COST 

age  it  is  clear  that  under  this  head  must  fall  the  following 
classes  of  expenditure : 

1.  For  production  of  locomotive  power. 

2.  For  maintenance  of  equiimient. 

3.  For  certain  items  of  maintenance  of  way. 

4.  For  train  service  and  supplies. 

5.  For  superintendence  and  supervision  in  the  move- 
ment of  trains. 

6.  For  loss  and  damage  from  train  movement. 

And  certain  items  not  falling  under  the  above  heads 
and  not  susceptible  of  general  classification. 

One  of  the  most  detailed  classifications  of  disbursement 
accounts  or  operating  expenses  that  are  in  practical  use  is 
perhaps  that  compiled  by  Mr.  William  Mahl,  the  Comp- 
troller of  the  Southern  Pacific  system.  This  classification 
has  the  advantage  of  referring  each  item  to  its  place  in  the 
Interstate  Commerce  classification  (which  is  here  designated 
by  the  letters  I.  S.  C,  and  the  number  of  the  class),  thus 
permitting  ready  identification  in  both.  We  have  used  Mr. 
Mahl's  compilation  extensively  in  what  follows. 

We  have  the  following  items  of  expenditure  more  or  less 
directly  governed  by  the  train-mileage  (allowance  being 
made  where  necessary  for  extra  engine-mileage)  : 

1.     Production  of  Locomotive  Power. 

(a)  Wages  of  engineers  and  firemen  on  freight  and 
passenger  engines  engaged  in  making  revenue  train-mileage 
and  switching-mileage.     (T.S.C.  21.) 

(b)  Wages  of  roundhouse  men,  etc.     (I.S.C.  22.) 


TOX-MILE  COST  77 

(c)   Oil,  tallow  and  waste  used  on  locomotives  and 
miscellaneous  sui^plics.      (l.S.C.  24,  25.) 

2.  Maintenanee  of  Equipment. 

(a)  Eepairs  of  locomotives.     (l.S.C.  12.) 

(b)  licpairs  of  passenger  equipment,  including  oil- 
ing and  inspecting.     (l.S.C.  13.) 

(c)  Eepairs  of  freight  equipment,  including  oiling 
and  inspecting.     (l.S.C.  14.) 

3.  Certain  Items  of  Maintenance  of  Way. 

(a)  Kenewals  of  rails.     (l.S.C.  2.) 

(b)  Frogs  and  switches  and  rail  fastenings.     (I.S. 
C.  1.) 

(c)  Portion  of  tie  renewals.     (l.S.C.  3.) 

(d)  Portion  of  track  repairs.     (l.S.C.  1.) 

(e)  Portion  of  bridge  repairs.     (l.S.C.  4.) 

4.  Train  Service  and  Supplies. 

(a)  Wages  of  conductors  and  trainmen  on  passenger 
trains.     (l.S.C.  26.) 

(b)  Wages  of  conductors  and  trainmen  on  freight 
trains.     (l.S.C.  26.) 

(c)  Train  supplies  and  expenses.     (l.S.C.  27.) 

(d)  Heating,  lighting,  cleaning,  lubricating  cars  and 
operating  sleeping  and  dining  cars.      (l.S.C.  27.) 

5.  Supervision   and  Superintendence   of  Train   Move- 
ment. 

(a)  Superintendence  of  transportation.    (l.S.C.  20.) 

(b)  Clerks   and   attendance    (transportation).      (I. 
S.C.  20.) 


78  TON-MILE  COST 

(c)'  Switchmen,,  flagmen  and  watchmen.     (I.S.C. 
28.) 

(d)  Signals  and  interlocking  plants.     (I.S.C.  31.) 

(e)  Portion  of  cost  of  operating  telegraph.     (I.S. 
0,  29.) 

6.  Loss  and  Damage  from  Train  Movement. 

(a)  Clearing  wrecks.     (I.S.C.  37.) 

(b)  Injuries  to  persons.     (I.S.C.  36.) 

(c)  Other  damage  from  train  movement.     (I.S.C. 
35.) 

And  among  the  miscellaneous  items  that  are  a  direct 
charge  against  train-mileage  or  train-movement  there  are 
the  following : 

7.  Miscellaneous. 

(a)  Locomotive  hire.     (I.S.C.  34.) 

(b)  Car  hire. 

Some  words  of  explanation  are  advisable  in  connection 
with  the  above  list  of  expenses. 

As  regards  Section  1,  most  of  the  items  therein  obviously 
belong  to  the  train-mile,  or,  rather,  the  engine-mile ;  that  is, 
to  the  production  of  locomotive  power.  It  is  to  be  noted 
that  in  the  case  of  switching  mileage,  the  tendency  will  be 
for  it  to  vary  in  inverse  ratio  with  revenue  train-mileage, 
assuming  the  quantity  of  transportation  produced  to  remain 
the  same.  Wages  of  roundhouse  men  and  roundhouse  ex- 
penses will  depend  largely  upon  the  number  of  locomotives 
in  use,  but  the  number  of  locomotives  will,  in  turn,  depend 
ctQ  the  amount  of  transportation  to  be  produced,  or,  rather, 
on  the  number  of  train-miles  (i.  e.,  units  of  service)  to  be 


TON-MILE  COST  79 

furnished  each  year,  and  the  size  of  the  locomotive  inven- 
tory is  governed  accordingly.  Fuel  and  other  locomotive 
supplies  are  pretty  closely  governed  by  the  mileage  made. 

In  Section  2,  containing  expenses  for  maintenance  of 
equipments,  expenses  are  governed  mainly  by  the  mileage 
made,  and  no  better  unit  is  possible.  In  a  general  way, 
however,  it  is  about  safe  to  reckon  normal  expenditures  at 
$1,000  to  $1,500  per  locomotive  per  annum,  $400  to  $600 
per  passenger  car  per  annum,  and  $35  to  $50  per  freight 
car  per  annum,  according  to  a  road's  equipment  and  char- 
acter of  business,  and  according  to  whether  or  not  it  is 
sufficiently  well  supplied  with  shops  and  machinery  for 
making  repairs.  The  above  standards  must,  of  course,  only 
be  used  in  a  very  general  way,  and  do  not  necessarily  apply 
strictly  in  all  cases. 

In  dealing  with  Section  3  some  difficulties  are  met.  In 
a  general  way  the  wear  of  rails  depends  mainly  upon  train 
movement,  and  renewals  are  a  proper  charge  against  train - 
mileage.  On  the  other  hand,  the  wear  of  rails  in  a  given 
place  depends  in  some  measure  on  location.  Grades  in- 
volving the  use  of  double  engine-mileage  ascending  and 
brakes  descending,  and  curves,  entail  more  severe  wear  on 
rails  per  train-mile  than  do  level  tangents.  Hence  the 
item  is  one  of  some  elasticity  wdien  it  is  used  as  a  unit,  but 
there  is  no  place  where  it  can  be  so  justly  charged  as  against . 
train  movement.  This,  of  necessity,  implies  charging  frogs, 
switches  and  rail  fastenings  in  the  same  way. 

As  regards  tie  renewals,  train  movement  is  undoubtedly 
a  large  factor  therein.     Damage  arising  from  constant  re- 


80  TON-MILE  COST 

spiking  and  indentation  or  cutting  by  the  rail,  goes  against 
train-mileage,  while  rotting  of  the  ties  goes  against  "wind 
and  weather,"  and  other  causes  arising  from  location.  Per- 
haps it  is  fair  to  reckon  one-third  of  the  tie  renewals 
against  train  movement.  Again,  certain  damages  to  track 
result  from  train  movement,  requiring  certain  labor  for 
their  repair,  such  as  surfacing,  tamping  and  lining,  replac- 
ing and  handling  rails,  etc.,  tightening  spikes  and  bolts,  and 
so  on.  Here  we  may  arbitrarily  charge  against  train  move- 
ment, say,  ten  per  cent,  of  repairs  of  roadway  and  track, 
eliminating,  of  course,  extraordinary  repairs  arising  from 
exceptional  damage.  It  might  also  be  right  to  charge  a 
small  proportion  of  bridge  repairs  in  the  same  way,  say, 
ten  per  cent.  It  is  clear  that  much  damage  results  from 
train  movement. 

In  dealing  with  all  these  items,  however,  it  must  be  re- 
membered that  it  is  impossible  mathematically  to  discover 
the  exact  proportion  of  cost  chargeable  to  train-mileage,  and 
that  where  arbitrary  division  is  made,  exact  conclusions 
must  not  be  hastily  based  thereon. 

In  Section  4  the  train-mile  is  an  excellent  and  almost 
exact  unit.  Trainmen  are  paid  by  the  trip,  which  is  reck- 
oned as  so  many  miles,  and  their  pay  depends  upon  the 
number  of  trips  they  make.  Train  supplies  may  reasonably 
be  measured  in  the  same  way,  and  it  is  clear  that  the  item 
of  heating,  lighting,  etc.,  can  more  fairly  be  measured  by 
the  train-mile  than  by  any  other  unit. 

Section  5  contains  some  items  of  more  or  less  fixed  ex- 
penditure which,  however,  are  unquestionably  chargeable 


TON-MILE  COST  81 

against  the  movement  of  trains,  as,  for  example,  superin- 
tendence and  clerical  service  employed  in  connection  with 
the  performance  of  transportation.  Labor  and  appliances 
employed  and  operated  for  the  protection  of  the  passengers 
and  the  public  against  the  accidents  connected  with  the 
movement  of  trains  are  also  to  be  charged  in  the  same  way. 
Under  this  head  comes  telegraph  service  in  connection  with 
the  train  dispatcher's  office. 

Damage  and  loss  from  train  movement  (Section  6)  must 
evidently  be  charged  against  the  train-mile,  as  it  is  the  direct 
result  thereof.  So  also  must  locomotive  and  car  hire  (Sec- 
tion 7)  for  obvious  reasons. 

All  the  items  enumerated,  therefore,  are  contingent  upon 
the  movement  of  trains,  either  directly  or  indirectly.  It 
might  be  desirable  in  a  very  strict  investigation  to  divide 
them  into  two  classes,  one  containing  directly  contingent  ex- 
penses, and  the  other  expenses  that  are  indirectly  con- 
tingent upon  the  unit  of  service,  but  for  the  present  purpose 
it  is  probably  sufficient  to  let  them  stand  in  one  class, 
that  class  being  subdivided  as  above.  Our  task  now  is  to 
consider  the  unit  of  cost  governing  the  other  expenses  of  a 
railroad,  apart  from  the  actual  movement  of  trains. 


CHAPTEE  IV. 

The  Units  or  Eailroad  Cost. 

(Continued.) 

As  explained  in  preceding  articles,  a  railroad  does  a  vast 
amount  of  work  preparatory  and  complementary  to  the 
actual  work  of  transporting  freight  and  passengers.  In  a 
general  sense  this  work  mainly  consists  in  the  establish- 
ment and  maintenance  of  a  plant  for  the  assembling  of 
freight  and  passengers  at  convenient  points  for  transporting 
it  and  them  to  the  required  destination,  this  plant  being 
devised,  generally  speaking,  with  a  view  to  the  comfort  and 
safety  of  passengers,  the  economical  handling  of  freight  and 
facilitation  of  train  movement. 

It  is  not  altogether  easj  to  devise  accurate  units  of  cost 
in  respect  to  this  work,  without  multiplying  the  number  of 
such  units  to  an  inconvenient  extent.  Many  different  kinds 
of  work  are  done  under  circumstances  apparently  independ- 
ent of  each  other.  Nevertheless  it  is  possible  to  establish 
the  following  classes  of  expenditure : 

II.     Expenses  for  general  direction,  clerical  work  and 
supervision — practically  fixed. 

III.  Expenses  for  collection  and  handling  of  freight  and 
passengers  at  terminals  and  intermediate  points. 

IV.  Expenses  for  maintenance  and  operation  of  plant 
not  dependent  upon  the  movement  of  trains. 

82 


TON-MILE  COST  83 

Very  many  sub-divisions  of  these  would  be  necessary  if 
scientific  units  were  desired,  but  there  would  be  large  num- 
ber of  these  units,  and  thereby  what  would  be  gained  in 
scientific  exactitude  would  be  lost  in  simplicity.  It  must 
be  remembered  that  in  an  industry  so  complicated  as  that 
of  transportation  units  must  either  be  very  numerous  or 
else  they  can  be  only  approximate.  It  is  the  object  of  this 
investigation  to  discover  the  best  (and  fewest)  units  of 
railroad  expenditure. 

In  Class  II.  would  be  found  the  following  items : 

(a)  General  Expenses.     (I.S.C.  47,  48,  49,  50,  51, 
52,  53.) 

(b)  Superintendence  of  traffic.     (I.S.C.  20.) 

(c)  Clerical  force  (traffic).     (I.S.C.  20.) 

(d)  Eents  and  expenses  of  office  buildings  used  in 
connection  with  above,  including  stationery  and  printing. 

(e)  Operating    telegraph.     (I.S.C.    29,    except    a? 
noted.) 

(f)  Incidentals. 

In  Class  III.  there  would  be : 

(a)  Station  service,  agents,  clerks,  etc.     (I.S.C.  30.) 

(b)  Station  and  terminal  expenses,  heating,  lighting, 
etc.     (I.S.C.  31.) 

(c)  Switching  charges.     (I.S.C.  32.) 

(d)  Advertising,  foreign  agencies, commissions.    (I.S. 
C.  39,  40.) 

(e)  Loss  and  damage  not  arising  from  train  move- 
ment.    (I.S.C.  35.) 


84  TOX-MILE  COST 

(f )  Lighterage,  marine  service  (other  than  that  used 
for  actual  transportation.)      (I.  S.  C.  38.) 

(g)  Tickets,  tariffs,  etc.     (I.S.C.  45.) 

(h)  Operating  stock  yards  and  elevators.  (I.S.C. 
42.) 

(i)     Eents,  tracks,  yard  terminals. 
Class  IV.  includes : 

(a)  Eepairs  of  roadways  and  tracks,  not  dependent 
upon  train  movement.  (I.S.C.  1,  2,  3,  4,  5,  except  as  noted 
already  in  connection  with  rail,  track,  bridge  and  tie  re- 
newals and  repairs.) 

(b)  Eepairs  of  bridges,  fuel  stations,  water  stations, 
docks  and  wharves,  telegraph.     (I.S.C.  6,  7,  8.) 

(c)  Stationery,  incidentals,  etc.,  in  connection  with 
above.     (I.S.C.  9,10.) 

(d)  Eepair  shops,  machinery,  ferries,  lighters,  work 
equipment,  tools,  heating  and  lighting  in  connection  there- 
with.     (I.S.C,  15,  16,  17,  18,  19.) 

(e)  Superintendence,  clerical  force,  etc.,  for  above. 
(I.S.C.  11,  19.) 

(f)  Expenses  incidental  thereto.     (I.S.C.  18,  19.) 

(g)  Insurance. 

(h)     Eenewal  of  ties.     (I.S.C.  2,  3.) 

And  possibly  other  expenses  not  specified  in  this  classifi- 
cation of  the  Interstate  Commerce  Commission. 

Expenses  in  Class  II.,  that  is,  expenses  more  or  less  fixed 
in  character,  belong  to  the  general  organization  of  the  rail- 
road company,  and  if  measured  by  anything,  are  to  be  meas- 
ured against  the  general  volume  of  business  done  by  the 


TON-MILE  COST  8a 

company.  They  should  bear  a  certain  pro^Dortion  to  the 
revenue  from  the  business  done,  as  a  railroad  should  in 
these  matters  cut  its  coat  according  to  its  cloth.  The  ratio 
of  these  expenditures  to  the  gross  revenue  should  tend  to 
constancy,  and  consequently  this  ratio  should  be  the  best 
measure  for  them. 

Expenses  in  Class  III.  are  of  a  different  character.  They 
bear  direct  relation  to  the  actual  volume  of  freight  aud 
passengers  handled,  but  have  little  or  no  reference  to  the 
distance  to  which  this  freight  and  these  passengers  are 
hauled.  Station  and  terminal  service  is  proportioned  to  the 
number  of  passengers,  and  the  number  of  tons  of  freight 
handled.  Switching  charges  vary  more  with  the  number  of 
car-loads  handled  than  with  anything  else,  and  are  inde- 
pendent of  the  car-miles  made  or  to  be  made.  Item  (d) 
perhaps  might  have  some  relation  to  the  amount  of  trans- 
portation as  well  as  the  number  of  passengers  and  tons  of 
freight  to  be  secured,  but  the  latter  are,  on  the  whole,  the 
safest  measure.  Still  if  there  is  one  item  in  railroad  ex- 
penses which  is  governed  by  the  passenger-mile,  it  is  this 
item.  Lighterage,  etc.,  is  clearly  a  terminal  expense,  and 
is  governed  by  the  amount  of  freight  handled.  Stock-yards 
and  elevators  are  of  a  similar  character.  Class  III.  there- 
fore may  properly  be  measured  by  the  ton  and  by  the  pas- 
senger as  a  unit. 

Class  TV.  contains  expenses  for  maintaining  general 
plant.  In  a  broad  sense  the  importance  or  size  of  a  railroad 
plant  is  proportioned  to  the  length  of  road  in  miles;  i.  e.,  to 
the  length  of  main  track.     The  proportion  of  double-track. 


86  TON-MILE  COST 

third  and  fourth  track,  and  side  track,  to  main  track  is,  of 
course,  important  in  its  bearings  on  total  cost  of  mainten- 
ance. Probably  the  unit  for  this  class  of  expense  would 
be  the  road-mile,  reckoning  double  track  as  double  mileage. 
It  is  true  that  all  items  of  a  railroad's  equipment  do  not 
depend  on  its  mileage,  as,  for  example,  bridges,  tunnels, 
buildings,  docks,  wharves,  etc.,  but,  in  a  general  sense  ex- 
ceptis  excipiendis,  these  may  be  taken  as  tending  to  uni- 
formity. Again,  it  is  true  that  the  size  of  a  road's  shops, 
machinery,  etc.,  depends  mainly  on  the  size  of  its  equipment 
inventory,  which  in  turn  depends  mainly  on  the  volume  of 
business  that  it  expects  to  do.  The  road-mile  may  some- 
times not  be  a  fair  measure  of  expenses  in  connection  with 
these  items.  Nevertheless  in  practice  it  tends  to  measure 
them  with  sufficient  closeness,  and,  of  course,  in  comparing 
a  road  with  itself  in  previous  years,  the  measure  is  accurate 
enough. 

Xjet  it  be  remembered  that  one  of  the  purposes  of  this  in- 
vestigation is  to  discover  the  best  standards  or  measures  of 
railroad  expense.  It  should  be  clear  by  this  time  that  there 
can  be  no  mathematically  perfect  measures ;  all  that  can  be 
obtained  are  reasonably  correct  units,  each  governing  cer- 
tain classes  of  expenditure.  Our  inquiry  so  far  therefore 
tends  to  show  that  railroad  expenditures  fall  into  four  main 
classes,  each  with  its  governing  unit,  as  follows : 

Class  I. — Expenditures  for  actual  production  of  trans- 
portation ;  unit  the  revenue  train-mile. 

Class  II. — Expenditures  for  general  direction,  clerical 
work  and  supervision ;  unit  the  percentage  of  total  revenue. 


TON-MILE  COST  87 

Class  III. — Expenditures  for  collection  and  handling  of 
freight  and  passengers  at  stations,  terminals  and  inter- 
mediate points;  units  the  ton  and  passenger. 

Class  IV. — Expenditures  for  the  maintenance  and  oper- 
ation of  plant  not  dependent  upon  the  movement  of  trains ; 
unit,  the  mile  of  track. 

Having  established  so  much,  there  remains  another  very 
important  problem,  viz.,  the  division  on  an  equitable  basis 
of  expenditures  between  passengers  and  freight.  This,  of 
course,  is  necessary  to  determine  the  ton-mile  and  passenger- 
mile  cost  and  profit,  and  it  involves  a  number  of  different 
points. 

Certain  items  of  railroad  expense  can  be,  and  by  many 
railroads  in  their  annual  reports  are,  allotted  definitely  to 
freight  and  passenger  service  respectively.  Labor  of  cer- 
tain kinds  is  susceptible  of  this,  as,  for  instance,  locomotive 
and  train  service,  and  service  at  terminals  and  stations.  On 
the  other  hand,  other  kinds  cannot  so  be  allotted,  as,  for 
instance,  labor  on  maintenance  of  track,  etc.  It  is  there- 
fore evident  that  some  arbitrary  method  or  methods  must  be 
adopted  for  the  allotment  between  freight  and  passengers 
of  a  large  number  of  items  of  railroad  expense.  The  prob- 
lem is  to  find  the  fairest  and  safest  methods  of  dividing 
such  expenses. 

Eecurring  to  our  four  classes  of  expenditure  and  our  four 
units,  we  find  that  in  regard  to  most  of  the  items  in  the 
first  class  the  lines  are  sharply  drawn  between  freight  and 
passenger  service.  Passengers  do  not  travel  on  freight 
trains,  nor  is  freight  hauled  on  passenger  trains,  except 


88  TON-MILE  COST 

in  the  case  of  mixed  train  mileage,  which  is  a  small  matter 
at  all  times  on  all  roads.  So  many  engine-miles  are  run 
in  each  kind  of  service  (and  switching  mileage  is  practically 
all  freight  engine-mileage),  hence  it  is  beyond  doubt  fair  to 
allot  such  expenses  in  this  class  as  do  not  allot  themselves, 
to  freight  and  passengers,  according  to  the  respective  pro- 
portions of  freight  and  passenger  train-mileage.  Conse- 
quently, in  this  class  the  engine-mile  and  the  train-mile  are 
both  units.  It  is,  however,  probably  fair  to  charge  the 
freight  engine-mile  (where  a  report  does  not  itself  allocate 
the  expenses)  with  more  fuel,  supplies  and  labor  than  the 
passenger  engine-mile,  for  obvious  reasons,  and  the  same  is 
true  as  regards  train  service  and  the  train-mile ;  hence  where 
freight  engine  expenses  are  not  stated  separately  from  pas- 
senger engine  expenses  or  freight  train  expenses  from  pas- 
senger train  expenses,  it  will  be  necessary  to  charge  the 
freight  engine-mile  with  about  ten  per  cent,  and  the  freight 
train-mile  with  about  twenty  per  cent,  more  expenses  than 
are  charged  to  the  passenger  engine-mile  and  train-mile. 
The  other  undetermined  expenses  in  this  class  probably  may 
be  safely  divided  in  proportion  to  revenue  train  mileage, 
leaving  out  switching  mileage. 

As  regards  Class  II.,  containing  fixed  expenses,  it  is  clear 
that  the  unit  or  measure  thereof,  viz.,  the  percentage  of 
total  revenue,  is  also  a  fit  and  proper  measure  of  allotment 
between  freight  and  passenger  traffic.  The  proportion  of 
freight  to  passenger  revenue  is  the  proportion  of  freight  to 
passenger  expenditure  in  this  class.  It  is  hardly  necessary 
tc  say  much  in  proof  of  this. 


TON-MILE  COST  89 

In  Class  III.  it  should  be  possible  to  allot  directly  to 
either  freight  or  passenger  quite  a  good  many  of  the  indi- 
vidual items  of  expense.  A  railroad  company's  books  would 
certainly  provide  materials  for  such  allotment,  though,  per- 
haps, its  published  reports  might  not.  There  is  a  clear  de- 
marcation between  station  and  terminal  freight  and  pas- 
senger service,  both  as  to  labor  and  other  matters,  and  each 
kind  could  easily  be  stated  separately.  When  they  are  not 
stated  separately  it  is  not  easy  to  divide  them  on  any  but  an 
arbitrary  basis.  No  doubt  the  proportion  of  freight  to  pas- 
senger revenue  would  be  as  fair  a  basis  for  this  as  any  other, 
as  in  the  case  of  Class  II.  above. 

In  Class  IV.  nothing  but  an  arbitrary  basis  of  division  is 
possible  for  the  majority  of  expenses.  Here,  however,  in 
spite  of  the  fact  that  the  expenditures  are  not  dependent 
upon  train  mileage,  it  is  evident  that  the  size  of  plant  is 
more  or  less  proportioned  to  the  amount  of  service  to  be  per- 
formed. Hence  a  train-mileage  basis  would  be  a  fairer 
method  for  division  of  these  expenses  between  freight  and 
passengers  than  would  perhaps  any  other,  and  as  in  the  case 
of  Class  I.  it  will  be  so  applied. 

Consequently  we  have  the  following  rule  for  division  of 
expenses  between  freight  and  passengers,  that  are  not 
directly  allotted  to  one  or  the  other  by  their  very  nature: 
Expenses  in  Classes  I.  and  lY.  are  divided  on  an  engine- 
mileage,  or  train-mileage  basis  (with  tlie  necessary  allow- 
ances) ;  those  in  Classes  II.  and  III.  on  the  basis  of  pro- 
portionate revenue.  This  method  is  at  least  as  good  as  any 
other  for  purposes  of  comparison,  and,  of  course,  it  is  only 


90  TON-MILE  COST 

for  such  purpose  that  there  is  any  need  of  division  at 
all. 

We  have  now  established  the  four  main  units  of  railroad 
expenditure  and  a  rough  method  of  allotting  expense  be- 
tween freight  and  passengers.  Consequently  we  are  in  a 
position  to  determine  the  ton-mile  and  passenger-mile  cost 
on  a  given  property  and  the  factors  that  govern  that  cost. 
It  must,  however,  be  clearly  understood  that  absolute  results 
are  not  claimed,  because  they  are  obviously  unattainable. 
The  process  that  we  have  outlined  is  only  sufhciently  correct 
and  sufficiently  close  to  the  general  principles  involved  to 
yield  good  comparative  results.  We  may  proceed  to  a  prac- 
tical demonstration,  using  as  a  basis  the  figures  of  the  Penn- 
sylvania Railroad  for  1896.  These  figures  are  large  enough 
to  afford  very  good  standards,  as  they  cover  the  main  line 
operations. 


CHAPTER  V. 

Allocation  of  Expenses  Between  Freight  and  Pas- 
sengers. 

In  dealing  with  Pennsylvania  figures,  it  must  be  noted 
that  the  company  itself  states  its  ton-mile  and  passenger- 
mile  cost.  Doubtless  it  is  able  to  allocate  certain  expendi- 
tures exactly — as,  for  example,  locomotive  and  train  expen- 
ditures— which  cannot  be  directly  allocated  from  the  pub- 
lished report.  It  is  understood  that  in  dealing  with  other 
expenses  it  has  divided  them  on  a  train-mileage  basis, 
though  as  to  this  point  we  speak  under  correction.  The 
report  gives  the  total  expenditures  allotted  to  passengers  as 
$5,641,997.  As  will  be  seen,  our  figures  differ  somewhat, 
although  not  a  great  deal,  from  those  given  in  the  Pennsyl- 
vania report. 

We  first  divide  expenses  into  the  four  main  classes,  giving 
each  item  separately,  according  to  our  classification.  It  is 
proper  to  note  that  many  items  which  would  permit  of  exact 
allocation,  if  access  were  had  to  the  company's  books,  are 
not  susceptible  of  exact  allocation  from  the  published  re- 
ports, as,  for  example,  enginemen's  wages,  fuel,  train  ser- 
vice, and  so  on.  Hence  the  necessity  for  the  arbitrary  allow- 
ances described  in  foregoing  remarks.  A  railroad  account- 
ing force  would;  of  course,  need  no  such  rule. 

01 


93  TON-MILE  COST 

CLASS     I. — EXPENDITURES     FOR     ACTUAL     PRODUCTION     OF 
TRANSPORTATION. 

1.  Production  of  locomotive  power: 

(a)     Wages  of  engineers  and  firemen..  .$1,969,664.81 
(6)     Wages  of  round-house  men 563,981.98 

(c)  Fuel  for  locomotives 1,790,558.64 

Fuel  stations 122,785.91 

(d)  Locomotive  supplies 300,273.61 

Total $4,747,264.95 

2.  Maintenance  of  equipment: 

(a)  Repairs,  etc.,  locomotives $1,899,759.42 

(b)  Repairs,  etc.,  passenger  cars 693,854.68 

(c)  Repairs,  etc.,  freight  cars 3,387,064.61 

Total  $5,980,678.71 

3.  Maintenance  of  way: 

(a)     Renewals  of  rails $336,700.46 

(&)     Frogs,  switches,  etc 240,959.83 

(c)  Cross-ties,    renewals    (33 1-3    per 

cent.) 243,365.83 

(d)  Portion  of  trade  and  bridge  re- 

pairs (10  per  cent.) 235,274.50 

Total $1,056,300.62 


TON-MILE  COST  93 

4.  Train  service  and  supplies: 

{a,h)     Conductors,       baggagemen       and 

braJcemen $2,021,974.4! 

(c)     Train  supplies  and  expenses 135,422.10 

{d)     Heating,  lighting  and  lubricating 

cars    304,290.20 

Total  $2,461,686.83 

5.  Superintendence  and  supervision  of  transportation: 

(c)  Switchmen  and  watchmen $414,253.88 

(d)  Signals,  etc 33,888.37 

(e)  Telegraph      operating      (50      per 

cent.)    296,224.48 

Total    $744,366.73 

6.  Loss  and  damage  from  train  movement: 

(a)     Clearing  wrecks $78,903.41 

(&)     Injuries  to  persons 149,115.59 

(c)     Damage  from  train  movement..  . .        25,265.47 

Total $253,284.47 

7.  Miscellaneous: 

(a)     Car  mileage $258,437.37 

(&)     Hire  of  equipment 278,111.27 

Total $536,548.64 

Total  expenses  in  Class  I $15,780,130.95 


94  TON-MILE    COST 

CLASS  II. — EXPENDITURES   FOR   GENERAL   DIRECTION,    CLER- 
ICAL WORK  AND  SUPERVISION. 

(a)     General  expenses $1,032,613.40 

(&)     Superintendence  of  traffic 172,788.53 

(c)     Clerical  force  traffic 319,307.76 

{d)  Rents,  expenses,  office  buildings, 
including  stationery  and  print- 
ing    234,746.41 

(e)     Operating  telegraph  (50  per  cent.).  296,224.49 

(/)     Incidentals    63,930.93 

Total $2,119,611.54 

CLASS  III. EXPENDITURES  FOR  COLLECTING  AND  HAND- 
LING OF  FREIGHT  AND  PASSENGERS  AT  STATIONS,  TER- 
MINALS AND  INTERMEDIATE  POINTS. 

(a)     Station     service,     agents,     clerics 

yardmen,   etc $2,630,366.49 

(&)  Station  expenses,  heating,  light- 
ing, etc 224,968.26 

{d)     Advertising  foreign  agencies  and 

commissions    339,087.04 

(e)     Loss  and  damage  not  arising  from 

train  movement  (50  per  cent.)  .  .         25,265.47 

{h)     StocJc-yards  and  elevators 1,629.16 

(i)      Rents  of  yards  and  terminals 95,056.05 

Total $3,316,372.47 


TON-MILE  COST  \fi) 

GLASS    IV. EXPENSES    FOR    MAINTENANCE    AND    OPERATION 

OF  PLANT  NOT  DEPENDENT  ON  TRAIN  MILEAGE. 

(a)     Repairs  of  roadway,  traclc,  hridgcs 

(90  per  cent.) $2,117,470.57 

{!))     Repairs    buildings,    fuel    stations, 
tvatcr  stations,    docks,   wharves, 

telegraphs,  etc 503,879.G9 

(c)     Stationery,:  incidentals,  etc 8,729.07 

{d)     Repair    shops,    machinery,    tools, 

heating  and  lighting  same 443,284.08 

(e)     Supervision,  clerical  force,  etc.  . .  .  366,320.34 

(/)      Expenses  incidental  thereto 72,346.80 

(g)     Insurance 139,662.63 

\h)     Renewals  of  ties  {m  2-3  per  cent.)  486,731.73 

Total • $4,138,425.51 

Eecapitulating  and  summarizing  we  find  expenses  divide 
themselves  as  follows: 

Per  cent. 

Class  1 $15,780,131         62.24 

Class  2 2,119,612  8.34 

Class  3 3,316,372         13.10 

Class  4 4,138,425         16.32 

Total   $25,354,540       100.00 

We  next  proceed  to  divide  these  expenses  between  passen- 
gers and  freight,  according  to  the  ride  laid  down  in  the  fore- 


96  TON-MILE  COST 

going  argument,  for  cases  where  allocation  is  not  made  by 
the  company's  accounting  officers.  Classes  I.  and  IV.  are 
divided  according  to  train  and  engine  mileage,  and  Classes 
II.  and  III.  according  to  the  respective  proportion  of  freight 
and  passenger  revenue.  In  dealing  with  Class  I.,  however, 
we  allot  in  Section  1  10  per  cent.,  and  in  Section  4  20  per 
cent,  additional  to  freight,  and  in  Sections  1  and  2  engine- 
mileage  is  used,  i.  e.,  to  freight-mileage  is  added  sv/itching- 
mileage.  This  method  of  allocation  gives  the  following  re- 
sults : 

Freight.       Passenger.         Total. 

Class  I $12,325,318     $3,554,812     $15,780,131 

Class  II 1,621,552  498,060         2,119,613 

Class  III 3,537,034  779,348         3,316,373 

Class  IV 3,758,957       1,379,468         4,138,435 


Total..  ..$19,143,851     $6,311,688     $25,354,540 

The  measures  used  are  as  follows : 

Freight  engine-mileage,  72.3  per  cent,  of  total. 
Freight  train-mileage,  66.6  per  cent,  of  total. 
Freight  revenue,  76.6  per  cent,  of  freight  and  passenger 
revenue. 
As  is  seen  this  allocation  is  fairly  close  to  that  given  in  the 
Pennsylvania  report  itself.    Working  out  the  ton-mile  and 
passenger-mile  cost  we  find  them  to  be  0.344c.  and  1.809c., 
respectively,  against  0.355c.  and  1.644c.  as  reported  by  the 
company  itself.    This  is  fairly  close  agreement  on  the  whole. 
It  next  becomes  necessary  to  apply  to  these  expenses  our 


TOX-MILE  COST  97 

units  of  cost  as  already  described  and  enumerated.    These 
units  were  as  follows : 

Class  I. — The  passenger  train-mile,  the  freight  train-mile. 

Class  II. — The  proportion  to  total  revenue,  passenger  and 
freight. 

Class  III. — The  passenger,  the  ton. 

Class  IV. — The  mile  of  track. 
And  we  find  the  following  results : 

Pi^SSENGER  EXPENSES. 

Class  I. — Cost  per  passenger  train-mile,  40.921 
Class  II. — Cost  per  cent,  of  revenue  (passenger^ 
cent. 

Class  III. — Cost  per  passenger,  4-J  cents. 
Class  IV. — Cost  per  mile  of  track,  $513. 

FREIGHT  EXPENSES. 

Class  I. — Cost  per  freight  train-mile,  71.787  cents. 

Class  II. — Cost  per  cent,  of  revenue  (freight),  4.0  per 
cent. 

Class  III. — Cost  per  ton,  6  cents. 

Class  IV.— Cost  per  mile  of  track,  $1,017. 

It  therefore  appears  that  certain  definite  units  of  cost  are 
ascertainable  within  broad  limits.  It  is  not  claimed  for  the 
foregoing  that  they  are  by  any  means  mathematically  exact, 
but  it  is  evident  that  they  must  more  or  less  accurately  ex- 
hibit conditions  on  the  Pennsylvania  Road  under  present 
circumstances.  Of  course,  these  units  are  imperfect  in  them- 
selves, as  already  explained.  The  principal  factor  in  render- 
ing them  imperfect  is  the  entire  lack  of  necessary  depend- 
ence between  many  items  of  cost  and  the  measures  of  reve- 


98  TOX-MILE  COST 

nue,  and  the  uncertain  and  irregular  variations  in  relations 
between  any  one  unit  and  most  of  the  items  of  cost.  On  the 
whole,  however,  our  units  are  good  units  in  a  sense,  and  we 
claim  for  them  that  they  are  the  best  of  their  number  that 
can  be  devised  for  measuring  expenses. 

It  is  evident,  however,  that  with  the  exception  of  expenses 
in  Class  I.  (which  are  measured  by  what  is  probably  the 
most  perfect  of  all  the  five  items),  practically  all  the  ex- 
penses vary  in  considerable  measure  independently  of  the 
amount  of  transportation  performed  or  manufactured.  In 
all  probability  Pennsylvania  could  have  increased  its  busi- 
ness 10  per  cent,  without  materially  affecting  expenses  in 
Classes  II.,  III.  and  TV.  It  could  unquestionably  have 
handled  10  per  cent,  more  passengers  and  10  per  cent,  more 
tonnage  without  increasing  expenses  in  Class  III. ;  in  other 
words,  the  additional  10  per  cent,  would  certainly  never 
have  cost  4J  cents  per  passenger,  or  6  cents  per  ton.  In  that 
sense  the  passenger  and  the  ton  are  probably  not  perfect 
units,  but  the  larger  the  business  done  the  more  they  tend 
to  become  true  units. 

On  the  Pennsylvania,  for  example,  they  are  probably  bet- 
ter units  than  they  would  be  on  New  York  Central,  which 
has  a  smaller  density  of  business,  and  on  New  York  Central 
they  would  be  better  units  than  they  would  be  upon  St.  Paul, 
The  same  is  true  regarding  expenses  in  Class  II.  Conse- 
quently, in  dealing  with  these  units  in  the  case  of  a  given 
railroad,  reference  should  be  had  all  the  time  to  the  density 
of  business.  The  cost  per  unit  and  the  value  of  the  ujoit 
vary  inversely  as  the  density  of  the  business  done.    The  units 


TON'-MILE  COST  99 

in  the  case  of  such  a  road  as  the  Cotton  Belt,  for  exaTiiple, 
would  be  of  no  use  for  comparisons  with  those  of  New  York 
Central.  They  would,  however,  be  very  useful  for  their  own 
officers'  information  and  for  comparisons  of  the  road  with 
itself. 

Study  of  figures  given  in  the  preceding  remarks  brings 
out  some  points  that  may  perhaps  strike  many  people  as 
strange.  Considering  the  freight  and  passenger  train-mile 
expenses,  for  example,  which,  as  has  been  seen,  account  for 
about  63  per  cent,  of  the  whole,  they  make  the  following 
exhibit : 

Per  freight  Per  passenger 
train-mile,     train-mile. 

1.  For  production  of  locomotive 

power 23.138c.         11.350c. 

2.  For  maintenance  of  locomotives  8.064c.  6.083c. 
^     3.  For  maintenance  of  cars. .....  19.880c.  7.990c. 

4.  For  maintenance  of  way  (cer- 

tain items) „  .   4.135c.  4.043c. 

5.  For  train  service  and  supplies.  11.564c.  5.673c. 

6.  For  loss  and  damage  and  mis- 

cellaneous   superintendence, 

etc.  . 6.006c.  5,88c. 

Total 71.787c.         40.935c. 

From  this  it  is  seen  that  on  the  Pennsylvania  Road,  at  all 
events,  the  freight  train-mile  costs  about  31  cents  more  than 
the  passenger  train-mile. 


100  TOX-MILE  COST 

This  excess  is  found  as  follows : 

In  locomotive  power 11  cents 

In  maintenance  of  locomotives 2  cents 

In  maintenance  of  cars 12  cents 

In  train  service  and  supplies 6  cents 

It  must  be  remembered  that  the  freight  train-mile  must 
bear  cost  of  switching  engine-mileage,  as  well  as  double- 
headed  mileage  or  helping  mileage.  Also  freight  engine- 
mileage,  as  has  been  said,  is  more  expensive  because  it  is 
made  more  slowly  and  fewer  miles  go  to  the  freight-engine 
men's  day  than  to  the  day  of  the  passenger-engine  men. 

Again,  the  cost  of  freight-train  service  per  mile  is  much 
more  than  that  of  passenger-train  service  per  mile  for  more 
or  less  obvious  reasons.  It  may  be  stated  that  there  is  quite 
close  correspondence  between  the  figures  of  the  Pennsylvania, 
as  given  above,  and  the  figures  of  Norfolk  &  Western,  which 
make  a  very  similar  showing.  This  company  itself  sepa- 
rates passenger  and  freight  expenses  in  all  departments. 


CHAPTER  VI. 

The  Question  of  Ton-Mile  Cost. 


It  has  been  demonstrated  in  foregoing  remarks  that  the 
expenditures  governed  directly  by  the  revenue  train-mile,  or 
directly  contingent  upon  the  revenue  train-mile,  amount  to 
something  over  62  per  cent,  in  the  case  of  the  Pennsylvania 
road.  In  the  case  of  a  railroad  not  requiring  so  much  help- 
ing engine-mileage  and  switching  engine-mileage  as  does 
the  Pennsylvania  road,  these  expenditures  would  possibly 
absorb  a  somewhat  smaller  percentage  of  the  whole.  Their 
percentage  also  tends  to  diminish  as  the  total  business  of  the 
road  diminishes,  for,  other  things  being  equal,  the  tendency 
is  for  the  fixed  expenses  of  a  road  doing  a  moderate  busi- 
ness to  bear  a  larger  portion  of  the  whole  than  in  the  case 
of  a  road  doing  a  larger  business. 

It  is  certain  that  the  largest  single  group  of  items  of  ex- 
penditure is  that  containing  the  items  directly  dependent 
upon  train  and  engine-mileage.  Consequently,  it  is  obvious 
that  the  largest  and  most  important  factor  in  the  determina- 
tion of  ton-mile  cost  is  the  relation  between  the  number  of 
ton-miles  carried,  and  the  number  of  train-miles  run;  in 
other  words,  the  revenue  freight  train-load. 

This,  moreover,  is  the  factor  that  common  sense  would  at 
once  distinguish  as  the  most  important.  Tlic  relative  im- 
portance of  it  may  be  seen  from  the  figures  of  the  Pennsyl- 

101 


10,^^  -rO^fir-MILE  COST 

vania  road,  where  the  expenses  per  freight  train-mile  run  to 
something  like  73  cents.  In  the  ease  of  Norfolk  &  Western, 
moreover,  the  figures  reach  65  cents.  In  the  case  of  each  of 
these  roads  nothing  would  produce  so  much  effect  upon  ton- 
mile  cost  as  a  change  in  the  volume  of  the  revenue  freight 
train-load.  Let  us  suppose,  for  example,  that  the  Pennsyl- 
vania Company,  by  improving  its  grades,  enlarging  its  mo- 
tive power  and  watching  more  carefully  the  loading  of  cars 
and  making  up  of  trains,  contrives  to  handle  a  given  quan- 
tity of  ton-miles  with,  let  us  sa}^,  1,000  less  train-loads.  The 
ton-mile  revenue  would  be  the  same,  but  the  saving  in  cost 
achieved  by  cutting  off  1,000  freight-miles  would  be  about 
$720.  This  saving,  however,  would  be  diminished  by  two 
factors,  which  would  require  to  be  determined.  The  full 
saving  would  only  be  obtained  by  cutting  off  1,000  times  the 
average  engine-mileage  and  the  average  car-mileage  going 
to  each  train-mile  as  reckoned  in  our  tables.  In  other  words, 
to  obtain  the  full  saving,  the  efficiency  of  motive  power 
would  have  to  be  brought  up  (by  reduction  of  grades,  im- 
provement of  alignment,  etc.),  and  the  average  lading  of 
cars  would  have  to  be  increased  by  the  use  of  larger  cars 
and  by  greater  vigilance  in  car-lading.  If  this  could  not  be 
done,  and  if  the  heavier  freight  train-load  could  only  be  ob- 
tained by  additional  helping  engine-mileage  and  by  addi- 
tional car-mileage,  there  would  have  to  be  deducted  from 
the  $720  saved  the  cost  of  the  additional  engine  and  car- 
mileage.  This  would  involve  extra  fuel,  extra  wages  and 
extra  repairs  in  the  case  of  engine-mileage,  and  extra  re- 
pairs in  the  case  of  car-mileage.    We  may  take  a  hypothetical 


TON-MILE  COST  103 

case,  as  follows:  The  company  now  carries,  let  us  say, 
100^000,000  ton-miles,  and  uses  for  that  purpose,  say,  250,- 
000  freight  train-miles,  averaging  a  freight  train-load  of 
400  tons.  On  this  business  the  gross  revenue  is,  at  4  mills 
per  ton-mile,  $400,000.  Taking  the  cost  of  the  freight  train- 
mile  at  TZ  cents,  in  round  figures,  the  cost  of  doing  this 
business  is  $180,000,  exclusive  of  expenses  for  Classes  II., 
III.  and  IV.,  which  are  not  considered  for  the  moment. 
Now,  assume  that  the  company  raises  its  freight  train-load 
to  500  tons,  and  it  follows  that  in  order  to  do  the  same  busi- 
ness it  need  only  run  200,000  freight  train-miles.  These, 
at  72  cents,  will  cost  only  $144,000,  against  $180,000  cost 
at  400  tons  per  freight  train.  If  the  latter  freight  train- 
juile  contained  only  the  same  amount  of  engine  and  car 
mileage  as  at  first,  the  above  would  be  the  saving. 

Let  us  suppose,  however,  that  to  do  the  same  amount  of 
business  it  were  necessary  to  increase  the  helping  engine- 
mileage  to  a  certain  extent,  say,  50,000  miles;  there  would 
be  certainly  some  expense  additional.  We  may  take  the  en- 
gine-mile cost  at,  say  20  cents.  This  would  involve,  there- 
fore, an  additional  cost  of  $10,000,  which  would  diminish 
the  saving  by  that  amount. 

Again,  let  us  suppose  that  each  train  carried  two  more 
freight  cars,  this  would  involve  an  additional  car-mileage  of 
400,000,  and  at  a  cost  for  repairs  of  6  mills  per  car-mile, 
the  cost  would  be  $2,400.  This  also  would  have  to  be  de- 
ducted from  the  saving  as  assumed.  Adding  this  to  the 
$10,000  additional  cost  for  engine-mileage  gives  a  total  addi- 
tion of  $12,400,  which  would  leave  the  final  saving  under 


104  TON-IIILE  COST 

these  conditions  only  $23,600,  instead  of  $36,005  first  as- 
sumed as  saved.  Consequently  the  fact  that  both  engine- 
mileage  and  car-mileage  may  vary  with  respect  to  the  train- 
mileage  is  to  be  remembered  in  reckoning  the  saving  by  in- 
creasing the  number  of  tons  to  the  train. 

It  does  not  need  much  argument  to  show  that  the  classes 
of  expenditure  containing  the  items  for  all  kinds  of  work 
preparatory  to  and  preliminary  to  the  actual  furnishing  of 
actual  transportation  are  not  necessarily  affected  by  the  ton- 
mile,  and  consequently  do  not  tend  to  uniformity  of  ton- 
mile  cost,  for  there  is  no  connection,  except  a  very  loose  and 
general  connection,  between  the  number  of  ton-miles  fur- 
nished and  the  expenses  of  maintenance  of  track,  docks, 
wharves,  buildings,  etc.,  or  between  the  number  of  ton-miles 
and  the  expenditures  at  terminals,  stations,  etc.,  or  between 
the  number  of  ton-miles  and  fixed  expenditures  for  official 
salaries,  etc.  The  general  connection  that  does  exist  is 
predicated  upon  the  supposition  that  a  road  needs  so  much 
plant  and  so  much  general  force  to  do  about  so  much  busi- 
ness, and  in  this  respect  it  should  cut  its  coat  according  to 
^ts  cloth. 

The  ton-mile  is  a  measure  of  revenue,  and  a  road  should 
not  reckon  to  spend  more  than  so  much  of  its  revenue  upon 
this  class  of  work ;  therefore,  there  should  be  a  certain  ten- 
dency toward  steadiness  in  the  ton-mile  cost  for  these  items. 
There  is,  however,  no  such  relation  in  their  ease  as  cljtains  in 
the  case  of  the  train-mile  expenditures. 

Consequently  we  arrive  at  ihc  certain  conclusion,  alreadij 
stated,  that  the  supreme  factor  ?k  deiernunrnfi  the  cosi  of 


TON-MILE  COST  105 

ihe  ton-mile  is  the  train-load.  Inasmuch  as  this  determines 
also  the  profit  in  the  production  of  transportation,  it  must 
be  looked  upon  as,  beyond  any  other  single  factor,  the  touch- 
stone of  successful  or  economical  railroading.  Of  course,  it 
does  not  determine  all  expenses,  and  on  some  roads  it  detc- 
niines  more  than  others,  but  in  probably  every  case  it  deter- 
mines a  larger  proportion  of  ton-mile  cost  than  all  the  other 
factors  put  together. 

That  there  are  also  other  factors  in  the  detenu ination  of 
ton-mile  cost  is  sufficiently  obvious,  but,  as  has  been  stated, 
these  factors  are  apparently  independent  of  the  ton-mile, 
and,  moreover,  mutually  independent  of  each  other.  The 
unit  governing  Class  lY.  is,  in  a  certain  broad  sense,  related 
to  the  ton-mile,  inasmuch  as  the  ton-mile  is  a  measure  of  a 
portion  of  the  road's  revenue,  but  the  connection  is  far  from 
close.  There  need  be  no  necessary  stability  in  the  relation  of 
tons  to  ton-miles,  and  hence  Class  II.  is  not  dependent  upon 
the  ton-mile  in  any  way  except  very  loosely.  The  same  is 
true  of  Class  III.,  only  more  so.  There  is  no  way  in  which 
ton-milage  can,  automatically,  be  made  to  affect  these  ex- 
penses. 

Therefore,  to  affect  ton-mile  cost  in  these  departments  the 
expense  question  must  be  looked  at  by  itself  apart  from  the 
Ion-mile.  In  the  case  of  the  Pennsylvania  road  the  train- 
Joad  may  affect  as  much  as  63  per  cent,  of  the  ton-mile  cost. 
The  other  38  per  cent,  depends  upon  a  number  of  minor 
factors  that  need  hardly  be  discussed  at  any  length.  All 
railroad  men  are  fully  alive  to  the  importance  of  economy 
in  general  expenses,  in  station  and  terminal  expenses,  etc., 


106  TON -MILE  COST 

and  of  maintenance  expenses,  for  the  ways  and  reasons  there- 
of lie  upon  the  surface.  The  economy  of  the  freight  train- 
mile,  however,  does  not  generally  receive  the  appreciation 
or  attention  that  it  deserves,  perhaps  because  it  is  less  easily 
observed  as  to  its  results. 


CHAPTER  VII. 

Ton-Mile  Cost — The  Train-Load. 

A  railroad's  average  train-load  is  governed  by  several 
factors,  among  which  are — 

(a)  The  character  of  its  tonnage. 

(b)  The  condition  of  its  motive  power  and  permanent 
way. 

(c)  The  vigilance  of  its  management. 

Of  which  one  factor  is  beyond  control,  and  two  are  amenable 
to  control  at  the  hands  of  the  managers. 

Dealing  with  the  first  factor,  we  may  revert  to  the  re- 
marks on  the  units  of  transportation  at  the  outset.  It  was 
there  shown  that  short-haul  business  offering  in  small  quan- 
tities at  a  given  time  paid  higher  rates  than  long-haul  busi- 
ness offering  in  quantities.  The  reason  was  sufficiently  ob- 
vious in  that  the  short-haul  retail  business  was  more  ex- 
pensive to  handle  because  it  was  not  adapted  to  heavy  train- 
loads.  It  is  not  necessary  to  waste  much  time  proving  that 
tonnage  offering  in  less  than  car-load  lots,  and  consigned 
but  a  short  distance,  cannot,  as  a  rule,  be  handled  in  large 
bulk  at  one  time,  and  does  not  give  a  full  load.  This  would 
be  true  equally  of  grain  picked  up  on  a  western  branch  line 
and  high-class  manufactures  on  an  eastern  line.  One  reason 
why  the  Granger  roads,  and  notably  St.  Paul  and  Burling- 
ton &  Quincy,  do  not  average  heavier  train-loads  is  that  a 
large  proportion  of  the  mileage  of  these  companies  is  branch 

107 


108  TON-MILE  COST 

line,  from  which  freight  must  be  collected  in  small  lots. 
Putting  it  in  another  way,  a  good  deal  of  revenue  train- 
mileage  is  made  on  these  lines  almost  for  the  purpose  of 
switching  and  making  up  full  trains,  by  reason  of  the  large 
mileage  of  short  spurs  and  branches. 

When,  therefore,  a  road  does  a  largely  local  business 
(quite  apart  from  the  character  of  the  tonnage  offering)  it 
must  of  necessity  do  it  in  relatively  smaller  train-loads  than 
those  that  might  be  secured  where  the  freight  originated  in 
train-load  lots,  A  company  hauling  coal  from  coal  mines  to 
central  distributing  points  can  almost  always  secure  a  full 
train-load,  and  its  train-load  is  limited  only  by  its  motive 
power  and  grades.  Another  company  might  have  much  bet- 
ter grades  and  stronger  motive  power,  and  yet  show  a  train- 
load  much  smaller,  simply  because  most  of  its  freight  origi- 
nated in  less  than  train-loads  or  even  in  less  than  car-load 
lots.  Again,  the  short  haul  works  against  heavy  train-loads 
because  it  almost  always  signifies  considerable  dropping  and 
picking  up  of  freight  en  route,  which  prevents  the  train 
from  being  filled  to  its  capacity  throughout  the  run.  If 
freight  could  be  picked  up  and  delivered  in  train-loads,  the 
short  haul  would  be  no  bar  to  a  heavy  average  load. 

Consequently  the  character  of  a  company's  tonnage,  mean- 
ing thereby  not  merely  the  character  of  the  commodities 
transported,  but  also  the  circumstances  of  origin,  haul,  etc., 
is  a  limiting  factor  in  determining  the  company's  train-load 
possibilities  at  the  start.  All  that  a  company  can  do  is  to 
take  care  that  it  gets  as  heavy  a  load  as  is  reasonably  pos- 
sible under  the  conditions  thus  prescribed  by  nature. 


TON-MILE  COST  109 

The  next  factor  is  that  of  motive  power,  curves  and 
grades,  which,  of  course,  are  of  much  importance  in  limit- 
ing train-loads.  The  ideal  road  has  no  grades  and  no 
curves,  but  every  road  in  existence  has  both.  Unless  a  road's 
motive  power  is  suited  to  its  physical  characteristics,  it  is 
very  clear  that  the  road  is  hampered  in  attaining  its  proper 
train-load.  Of  course,  a  road  is  supposed  to  be  suited  to  its 
business.  It  would  be  a  great  waste  of  money  for  some  road 
with  short-haul  local  business  to  spend  much  to  take  out  one 
per  cent,  grades  or  eight  or  ten  degree  curves,  or  to  buy  very 
powerful  locomotives  because  they  could  not  get  the  train- 
load  at  the  outset  to  warrant  such  improvements.  On  the 
other  hand,  it  is  often  the  best  economy  for  a  half-bankrupt 
road  to  spend  money  on  just  such  things,  in  order  that  it 
may  exploit  the  possibilities  placed  within  its  grasp  by  the 
character  of  its  tonnage.  The  question  depends  largely  upon 
natural  characteristics. 

The  third  factor,  seemingly  the  least  important  of  the 
three,  may  be,  and  often  is,  the  controlling  factor  in  the 
whole  problem.  It  is  doubtful  if  any  railroad  management 
ever  approached  exhaustion  of  the  possibilities  of  train-load 
based  upon  its  existing  business  and  existing  facilities  of  mo- 
tive power  and  permanent  way.  There  is  probably  no  rail- 
road in  the  country  that  could  not  haul  a  larger  train-load 
than  it  actually  does  haul  with  its  already  existing  business, 
engines  and  roadbed.  Of  course,  this  is  nothing  more  than 
sa3dng  that  no  company  is  perfectly  managed — a  truism 
that  hardly  needs  repeating.  It  is  probable,  however,  that 
on  comparatively  few  roads  are  really  earnest  and  intelli- 


110  TON-MILE  COST 

gent  efforts  continually  bent  upon  the  question  of  getting 
the  largest  possible  amount  of  freight  into  every  train.  It 
is  most  certain,  though  demonstrated  only  in  a  negative  way, 
that  most  railroad  managers  could  do  a  great  deal  more  than 
they  are  doing  to  see  that  cars  are  better  loaded,  and  that 
trains  are  properly  filled  with  cars.  Evidence  that  supports 
this  contention  is  to  be  found  in  the  great  improvement  that 
has  taken  place  on  many  great  railroads  in  the  last  few  years 
in  this  respect.  If  so  much  could  be  done  in  so  short  a  time, 
is  it  not  clear  that  there  is  much  more  to  do  ?  It  is  not  so 
very  long  ago  that  transfer  sheds  (for  making  L.C.L.  lots 
into  C.L.  lots)  were  first  established,  and  there  are  not  so 
very  many  of  these  in  use  to-day  after  all.  Classification 
yards  are  now  looked  upon  as  a  necessity  on  most  large  sys- 
tems, but  even  these  are  of  comparatively  recent  growth. 

It  is  impossible  to  indicate,  even  roughly,  in  this  place  the 
general  methods  by  which  the  maximum  train-load  is  se- 
cured except  by  the  general  statement  that  they  all  consist, 
in  the  main,  of  fully  loading  the  cars  in  the  first  instance, 
and  then  fully  loading  the  engine.  Whatever  conduces  to 
this  conduces  toward  a  heavy  train-load.  Watchfulness,  in 
the  disposition  of  cars,  of  course,  diminishes  empty  car- 
mileage,  which  is  another  way  of  getting  to  the  same  goal. 
The  important  point  to  remember  is  that  in  all  probability 
much  more  can  be  done  in  all  cases  than  actually  is  being 
done. 

From  what  has  been  said  it  is  very  obvious  that  each  road 
has  its  own  problem  to  solve,  and  that  circumstances  differ 
materially  on  different  roads.    Consequently  it  is  unfair,  in 


TON-MILE  COST  111 

a  general  sense,  to  compare  one  road  with  another  in  the 
matter  of  train-load  unless  there  is  strong  similarity  between 
the  two  in  characteristics  of  road,  tonnage,  etc.  What  holds 
true  of  ton-mile  comparisons  holds  true  of  train-load  com- 
parisons. The  only  comparison  that  is  always  reasonably 
safe  is  that  of  a  road  with  itself. 

In  general,  it  may  be  said  that  no  money  is  wasted  on 
railroads  in  manufacturing  train-mileage.  The  waste  is  in 
the  use  of  train-miles  once  they  have  been  manufactured. 
If  this  primal  fact  could  be  impressed  upon  the  minds  of  all 
railroad  men,  no  doubt  the  saving  would  be  immense.  Many 
general  managers  will  perhaps  spend  months  in  devising 
means  to  cut  down  the  engine-mile  cost  by  half  a  cent,  but 
will  be  lavishly  wasteful  of  engine-miles  by  reason  of  failure 
to  watch  the  use  of  train-mileage  as  closely  as  they  watch 
the  use  of  coal.  It  is  a  good  thing  to  save  one  cent  per  en- 
gine-mile, but  it  is  a  better  thing  to  save  10  per  cent,  of  the 
engine-mileage  by  increasing  the  train-load,  and  the  latter 
saving  might  conceivably  be  much  easier  to  accomplish  than 
would  the  former. 


CHAPTER  YIIL 

Ton-Mile  Cost — Other  Factors. 

In  foregoing  remarks  we  have  described  the  division  of 
expenses  into  four  main  classes,  of  which  one  only  dealt  di- 
rectly with  the  actual  production  of  transportation.  It  has 
been  shown  that  this  class  alone  could  be  rendered  directly 
amenable  as  regards  ton-mile  cost,  viz.,  by  means  of  the 
train-load.  There  remain  three  classes  of  expenditure,  each 
governed  by  its  own  unit  or  measure,  and  each,  of  course, 
ultimately  appearing  in  the  final  ton-mile  cost,  though  in- 
dividually independent  of  the  variations  in  the  ton-mile. 

Considering  Class  II.,  which  contains  items  of  general 
expenditure  not  pertaining  necessarily  to  any  one  depart- 
ment of  service,  and  yet  pertaining  more  or  less  to  all  of 
them,  it  is  clear,  as  has  been  said,  that  they  should  bear  some 
general  relation  to  the  total  income  of  the  property.  As  the 
main  source  of  a  railroad's  income  is  the  sale  of  passenger- 
miles  and  ton-miles,  these  expenses  ought  to  be  governed 
more  or  less  by  the  number  of  passenger-miles  and  ton-miles 
sold.  In  this  sense  they  should  be  more  or  less  dependent 
upon  the  passenger-mile  and  ton-mile,  although  the  con- 
nection is  not  close,  nor  is  the  relation  intimate.  A  rail- 
road does  not  vary  its  items  of  general  expenditure  very 
much  from  year  to  year,  even  though  its  business  may  vary 
quite  considerably,  and  consequently  about  all  that  is  neces- 


TON-MILE  COST  113 

sary  is  to  see  that  too  much  is  not  being  spent  for  the  busi- 
ness done.  It  is  proper  to  note  that  the  percentage  of  total 
revenue  borne  by  expenses  in  this  class  tends  to  vary  in- 
versely to  the  total  volume  of  business.  In  other  word-, 
these  expenses  will  be  less  proportionately  for  a  road  with 
a  large  business  than  for  a  road  with  small  business.  And 
this  for  reasons  that  are  obvious.  They  should,  however,  be 
on  a  scale  more  or  less  proportioned  to  the  income. 

The  same  general  statement  is  necessarily  true  of  Class 
III.,  containing  expenses  for  station  and  terminal  service, 
but  here  an  entirely  different  factor  enters.  There  need 
necessarily  be  no  fixed  relation  between  tons  and  ton-miles, 
and  tons  are  clearly  the  measure  of  expenses  of  station  and 
terminal  service,  for  a  ton  that  is  destined  to  travel  10  miles 
requires  as  much  handling  as  does  a  ton  that  is  to  go  100 
miles,  and  it  might  conceivably  require  even  more.  Conse- 
quently, the  relation  between  expenses  in  this  class  and  the 
ton-mile  is  accidental,  at  all  events,  within  certain  limits. 
Eemembering,  however,  that  circumstances  of  length  of  haul 
are  important  in  fixing  ton-mile  revenue,  it  follows  that  the 
expenses  per  ton-mile  in  Class  III.  should  bear  some  general 
relation  to  ton-mile  revenue.  As  ton-mile  revenue  declines, 
owing  to  infusion  of  long-haul  business,  ton-mile  cost,  as 
far  as  Class  III.  is  concerned,  should  also  decline.  The 
measure  of  this  class,  however,  must  be  the  ton  or  the  pas- 
senger. 

In  Class  IV.  the  same  general  line  of  argument  will  hold 
good  as  in  the  case  of  Class  II.,  and,  in  a  measure,  of  Class 
III.     The  cost  of  maintenance  of  way,  plant,  etc.,  depends 


114  TON-MILE  COST 

altogether  on  the  character  of  plant  to  be  maintained,  and 
the  general  character  of  plant  depends,  or  should  depend, 
upon  the  general  volume  and  character  of  business  to  be 
transacted.  A  railroad  plant  should  be  suited  to  its  busi- 
ness, and  usually  is  so  suited.  The  greater  the  business  done 
the  more  complete  the  plant  and  the  more  expensive  the  an- 
nual maintenance.  Consequently  there  should  be  some 
rough  correspondence  between  maintenance  cost  and  the 
amount  of  service  performed.  There  need,  however,  be  no 
particular  correspondence  or  relation  between  the  ton-mile 
and  the  cost  for  maintenance  of  way.  The  size  of  the  plant 
and  its  characteristics  determine  the  cost  of  keeping  it  up 
and  improving  it.  Ton-mile  cost  for  these  items  might  and 
does  vary  without  regularity.  The  unit  of  size  is  the  only 
reasonable  unit  for  Class  IV.,  that  is  the  mile  of  main  track. 


CHAPTER  IX. 

Predetermination  of  Ton-Mile  Cost. 

]f  it  were  possible  to  determine  in  advance  the  cost  of 
doing  railroad  business,  it  is  obvious  that  there  would  be  in- 
troduced into  the  science  of  transportation  a  factor  making 
strongly  for  the  establishment  of  stable  rates.  Of  course,  it 
is  possible  to  determine  a  greater  cost  in  the  case  of  a  given 
shipment  than  in  the  case  of  another,  though  it  is  quite  im- 
possible to  determine  absolute  cost  in  the  case  of  either;  in 
fact,  it  is  clear  that  in  the  railroad  industry  there  is  no  such 
thing  as  absolute  cost,  for  from  what  has  been  said  in  fore- 
going remarks,  it  must  be  plain  that  cost  may  vary  as  cir- 
cumstances vary,  and  circumstances  vary  all  the  time. 

For  example,  the  cost  of  shipping  a  train  load  of  wheat 
from  St.  Paul  to  Duluth  will  vary  according  as  a  return 
load  can  or  cannot  be  obtained  for  the  cars  from  Duluth  to 
St.  Paul.  The  movement  of  empty  cars  from  place  to  place 
must  be  regarded  as  revenue  train-mileage.  If  we  imagine 
a  train  of  fifty  cars,  each  carrying  25  tons  of  wheat,  run- 
ning, say,  130  miles,  the  train-mileage  is  120,  and  the  aver- 
age freight  train-load  is  l,2oO  tons,  but  if  through  lack  of 
freight  at  Duluth  the  cars  must  come  back  empty, 'the 
revenue  train-mileage  run  in  connection  witli  the  shipment 
is  240  miles,  and  the  average  train-load  is  but  625  tons.  In 
the  one  case,  ton-mile  cost  is  much  heavier  than  in  the  case 
where  a  return  load  of  freiorht  can  be  obtained. 


116  TON-MILE  COST 

Again,  it  may  not  be  possible  to  obtain  a  full  train-load  in 
connection  with  a  given  shipment,  and  the  result  is  that  the 
shipment  is  made  at  one  time  in  a  less-than-train-load  lot. 
The  cost  is  greater  in  this  case  than  it  would  be  if  addi- 
tional freight  could  be  secured  to  make  a  full  train-load, 
and  thus  spread  the  cost  over  a  larger  consignment. 

It  ought  not  to  be  necessary  to  multiply  examples  to  prove 
that  the  ton-mile  cost  is  the  product  of  many  factors  which 
are  liable  to  vary  considerably,  and  that,  therefore,  no  pre- 
determination of  absolute  cost  is  possible.  Something,  how- 
ever, can  perhaps  be  done  if  there  is  knowledge  of  the  fac- 
tors entering  into  ton-mile  cost  and  their  average  value. 

We  analyzed  the  Pennsylvania's  operating  expenses  with 
the  object  of  ascertaining  the  value  of  the  principal  units  of 
cost.  We  found  a  value  for  the  freight  train-mile,  the 
handling  of  a  ton  of  freight  at  stations  and  terminal  points, 
and  for  the  maintenance  of  fixed  plant,  and  we  found  the 
relation  between  general  expenses  and  general  revenue.  The 
ton-mile  cost  of  each  worked  out  as  follows : 

Class  I.  (The  train-mile) •jfiJB^V'  *  ^'^-^^ 

Class  II.   (General) ^a'*^-^'*V^-  •  •  •  ^-^^^ 

Class  III.  (Station  and  terTpi^|f|^t^^^. 0.045 

Class  IV.  (Maintenance  of  ftei^? 0.056 

Total 0.344 

These,  of  course,  were  the  average  results  of  all  the  busi- 
ness done,  which  brought  in  an  average  ton-mile  revenue  of 


TON-MILE  COST  117 

0.507  cents,  from  which  it  appears  that  the  ton-mile  ex- 
penses were  about  6S  per  cent,  of  the  ton-mile  revenue. 

In  dealing  with  averages  it  must  be  remembered  that  they 
are  true  only  of  large  masses  of  figures  or  facts,  and  that 
they  do  not  hold  good  of  individual  cases  unless  purely  by 
accident.  Hence  it  would  be  unreasonable  to  apply  to  given 
shipments  the  results  of  all  shipments  unless  it  were  done  in 
every  case.  Even  then  the  results  in  given  cases  would  be 
most  misleading.  Very  large  quantities  of  freight  are  car- 
ried on  the  Pennsylvania  road  at  a  cost  of  less  than  3.44 
mills  per  ton-mile,  and  large  quantities  are  carried  at  a  much 
higher  cost.  There  is  apparently  no  way  to  tell  even  the 
highest  and  low^est  ton-mile  cost  on  the  Pennsylvania,  or  any 
other  road,  much  less  the  cost  of  any  individual  shipment. 

It  has,  however,  been  shown  that  the  train-mile  cost  on 
the  Pennsylvania  was  more  or  less  clearly  ascertained,  and 
that  train-mile  cost  accounts  for  62  per  cent,  of  total  ex- 
penditures. !N'ow,  train-mileage  is  a  thing  of  which  some- 
thing can  be  known  beforehand,  more  especially  when  large 
quantities  of  freight  are  to  be  dealt  with  at  a  given  time. 
It  will  happen  in  most  cases  that  it  will  be  possible  to  esti- 
mate pretty  closely  the  amount  of  train-mileage  required  to 
haul  a  given  quantity  of  freight  a  certain  distance.  Ex- 
perience, moreover,  will  show  how  much  allowance  is  to  be 
made  for  empty  car-mileage  in  connection  with  each  batch 
of  loaded  train-mileage.  On  certain  kinds  of  freight  the 
empty  mileage  will  be  50  per  cent.,  or  thereabouts — as,  for 
example,  coal — on  others  it  will  be  much  less.  It  is  not  diffi- 
cult to  make  proper  allowance  in  each  case  within  certain 


118  TON-MILE  COST 

broad  limits.  When  that  has  been  done  the  cost  of  the  ton- 
mileage  made  by  that  shipment  can  be  ascertained  as  far  as 
expenses  in  Class  I.  are  concerned.  These  expenses  are  62 
per  cent,  of  the  whole,  and  freight  expenses  are  68  per  cent, 
of  freight  revenue,  so  that  if  all  shipments  are  thus  treated 
and  are  handled  on  an  allowance  of,  say,  40  per  cent,  of  ton- 
mile  revenue  for  train-mile  expenses  the  final  results  will  be 
all  right.  To  illustrate  by  an  example :  Suppose  a  railroad 
is  considering  the  shipment  of  500,000  bushels  of  wheat 
from  Chicago  to  New  York.  Its  train-mile  expenses,  com- 
puted as  we  have  computed  those  of  the  Pennsylvania,  are 
60  cents;  its  freight  expenses  are  66  2-3  per  cent,  of  the 
whole,  and  its  average  empty  car-mileage  is  33  1-3  per  cent., 
and  its  line  is  1,000  miles  long.  It  can  haul  fifty  cars  to 
the  train  with  600  bushels  to  the  car.  What  is  the  lowest 
rate  it  should  make  to  get  its  average  profit  on  the  busi- 
ness? 

To  do  the  business  it  must  run  833  car-loads  eastbound, 
and  278  cars  westbound  (empty),  that  is,  in  round  figures, 
17  train-loads  east  and  5  train-loads  west,  or  22,000  freight 
train-miles.  The  cost  of  these  22,000  freight  train-miles  at 
60  cents  will  be  $13,200.  Consequently,  the  company  should 
receive  $33,000  at  least  to  cover  expenses  and  profits  on  the 
shipment,  which  should  work  out  6.6  cents  per  bushel,  or, 
in  round  figures,  11  cents  per  100  pounds.  The  rate  per 
ton  would  be  $2.42,  and  per  ton-mile  it  would  work  out 
0.242  cents. 

If  the  road  could  haul  60  cars  per  train  the  train-mileage 
would  be  reduced  3,000,  the  cost  $1,800,  and  the  rate  re- 


TON-MILE  COST  Hi) 

quired  to  cover  the  cost  would  be  9.5  cents  per  100  pounds, 
$1.1)0  per  ton,  and  0.190  cent  per  ton-mile. 

This  process  is  predicated  upon  a  general  average  relation 
on  a  particular  road  between  train-mile  cost  and  other  ex- 
penses, and  upon  a  general  average  relation  between  all  ex- 
penses and  all  revenue.  In  so  far  as  the  process  is  effective 
it  can  be  used  to  predetermine  ton-mile  cost  in  a  rough  wa}^ 
but  only  in  a  very  general  way.  It  is  difficult  to  see  how 
much  more  than  this  can  be  done  without  a  knowledge  of  a 
multitude  of  circumstances  that,  from  the  very  nature  of 
things,  cannot  be  known  beforehand.  It  is,  however,  prob- 
ably advisable  to  go  so  far  in  this  direction,  and  no  doubt 
many  railroad  managers  employ  this  or  a  similar  method 
with  regard  to  the  making  of  rates  at  times  when  rates  are 
cut  generally  and  shipments  are  hawked  around  from  one 
road  to  another.  On  the  other  hand,  a  great  many  railroad 
men  undoubtedly  use  neither  this  nor  any  other  method  to 
estimate  cost  of  doing  business,  and  make  their  rates  gen- 
erally in  a  blind  manner. 

To  estimate  ton-mile  cost,  according  to  the  above  plan, 
therefore,  a  railroad  man  should  know — 

1.  The  cost  of  his  average  train-mile,  i.  e.,  the  expenses  in 
Class  I.  divided  by  the  train-miles. 

2.  The  average  proportion  of  expenses  in  Class  I.  to  all 
freight  expenses. 

3.  The  average  proportion  of  freight  expenses  to  freight 
revenue  per  ton-mile. 

4.  The  average  proportion  of  empty  car-mileage. 

And  if  he  knew  these  things  he  could  probably  make  a  fair 


120  TON-MILE  COST 

guess  at  the  cost  of  doing  cerlai]i  business  at  certain  times. 
There  would  be,  of  course,  no  difficulty  in  ascertaining  and 
providing  these  figures  on  a  given  road.  The}^  can  be  ob- 
tained roughly  from  published  reports,  and  therefore  can  be 
obtained  with  much  greater  accuracy  from  the  books.  Uni- 
formity in  the  statement  of  train-mileage  is,  of  course,  de= 
sirable,  or,  rather,  necessary.  In  order  to  secure  this,  a 
secondary  division  of  Class  I.  into  engine  expenses  and  train 
expenses  is  desirable,  so  that  the  cost  of  the  engine-mile  apart 
from  the  train-mile  can  be  known.  It  is  consequently  neces- 
sary to  reckon  train-mileage  always  in  the  same  wa}^  and 
for  the  purpose  of  this  investigation  the  revenue  train-mile 
is  supposed  to  be  measured  by  the  distance  covered  by  train 
crews  independently  of  the  amount  of  engine-mileage  neces- 
sary to  make  the  train-mileage.  The  engine-mileage  should 
be  known  and  separately  stated,  so  that  the  average  train- 
mile  should  be  known;  that  is,  the  average  engine-mileage 
made  with  each  train-mile. 

It  is  probable  that  the  vexed  question,  ^^What  is  a  train- 
mile  ?''  will  only  be  settled  by  a  general  agreement  to  state 
separately — 

(a)  The  mileage  of  train  crews. 

(b)  The  mileage  made  by  engines  on  the  various  kinds 
of  revenue  service. 

SUMMARY. 

It  would  be  an  easy  matter  to  prolong  this  general  in- 
vestigation so  as  to  cover  in  detail  many  subjects  that  have 


TON-MILE  COST  121 

been  merely  touched  upon  in  this  series,  but  seeing  that  only 
a  general  view  has  been  attempted  it  is  advisable  to  leave  for 
another  occasion  matters  of  detail  and  matters  affecting  pas- 
senger transportation.  We  have,  however,  with  reference 
to  freight  transportation,  established  a  number  of  proposi- 
tions as  true  which  may  be  summarized  as  follows: 

/.  That  the  ton-mile  is  the  unit  of  product  and  the  meas- 
ure of  gross  revenue  in  freight  transportation. 

II.  That  ton-mile  revenue  varies  according  as  a  numher 
of  factors  vary,  of  vjhich  hut  one  has  much  bearing  upon 
cost  of  production. 

III.  That  the  principal  factor  in  determining  ton-mile 
cost  is  the  relation  of  ion-mile  to  train-mile,  viz.,  the  average 
revenue  freight  train-load. 

IV.  That  the  importance  of  the  train-load  as  a  factor  in 
ton-mile  cost  varies  as  the  density  of  business. 

V.  That  it  is  impossible  to  determine  absolute  ton-mile 
cost  in  any  case;  but 

VI.  That  on  a  road  tvith  large  density  of  business  it  is 
possible  to  determine  approximate  ton-mile  cost. 

It  must  be  admitted  that  in  proportion  as  the  density  of  a 
road"s  business  decreases  the  factors  in  ton-mile  cost  become 
relatively  less  valuable,  for  reasons  that  are  clear.  This  is  a 
necessary  consequence  of  the  very  nature  of  the  problem. 
The  more  dense  the  business  done,  the  more  correct  become 
the  factors,  and  the  more  accurately  do  they  tend  to  measure 
or  govern  cost. 


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OCT  2 


IS30 


MAff  114  1952 

ncr  •'        i 
NOV  4  ip:^ 


VR  72997 


